How are Earnings from Experiments Determined?
At the beginning of the semester, I will propose a “tax” which I will match at 50% out of my own pocket to create financial incentives for the classroom experiments, which are the heart of MBA 211. At the end of the semester you will be paid, in cash, an amount based on your (financial) performance in the experiments over the course of the semester.
Historically, there have been a number of questions as to how this compensation is determined. Hence, I have prepared the FAQ.
1. What is the formula for compensation?
Answer: I add up the total amount of your team’s financial earnings (in experimental dollars) over the course of the semester. I then weight these earnings against the average earnings of the previous class of Game Theory. For spring 2008, the spring 2007 MBA 211 is the benchmark. If your performance is near the average of the “benchmark” you can expect a 50% return on your investment. If it is well above the average, your return will be higher. If it is well below, your return will be lower.
2. Is there any advantage to sacrificing some of my own profits to lower other teams’ profits?
Answer: There is absolutely no advantage to this strategy. Since your compensation is based purely on your performance compared to the previous class, the best strategy is simply to earn as much as possible. Indeed, any strategy that involves your sacrificing profits also means that you are lowering the amount of cash paid to you at the end of the semester. Of course, by lowering other teams profits, they’ll be making less at the end of the semester too (and I’m sure they’ll thank you for that in due time). Bottom line: Lowering the earnings of other teams merely means that everyone gets less money.
3. Is my payoff at the end of the semester determined relative to other teams?
Answer: No. It is determined relative to the average earnings of the class in spring 2007.
4. What is the best overall strategy for experiments in the semester?
Answer: Try to earn as much as you can. Of course, you know that there will be about 12 experiments during the course of the class, so it is possible that your strategies in one experiment could affect your earnings in a later experiment based on other teams learning about your tendencies.