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Singing Penguins Help MBA Students Learn About Markets

Singing. Dancing. Cartoon penguins.

Hollywood thinks that's a formula for movie gold, but how about America's movie-going public? Tom Gruca, a business professor in the Tippie College of Business, is using Friday's release of the movie "Happy Feet" as a chance for graduate marketing students to learn about the operation of prediction markets by forecasting whether the heavily promoted movie will be bust or boffo.

The students in Gruca's first-year MBA marketing management class and the second-year strategy class are trading futures contracts in the real-money Iowa Electronic Markets to predict the movie's first-month domestic box office revenues. The students' grades on the project are based on a report detailing their forecast as well as how their investments in the IEM perform. Every first and second year student in the MBA program was provided $10 trading accounts and they can add more of their own money if they want, up to the market's account limit of $500.

Although better known for its political prediction markets, the IEM is also used to teach students about the operation of financial markets. Other markets operated mostly for classroom purposes include markets that track Federal Reserve monetary policy, Microsoft stock price level, and computer industry returns. Unlike the political markets that are open to the public for trading, the IEM's classroom markets are usually open only to traders with an academic affiliation. Gruca said the IEM is a useful teaching tool because it's a real world demonstration of a student's understanding of the material.

"In most instances, when a student reports on a case study, it's the opinion of the instructor that determines whether the student understood the key issues," Gruca said. "When we use the IEM, the market determines whether the student did a good job forecasting and implementing their trading strategy. The feedback is direct to the student and not filtered through the opinion of the instructor."

Movies are a particularly attractive subject for teaching about markets. Since all students are familiar with movies, they provide a comfort level that students may not have if they traded traditional commodities like grain futures. Movie box office markets can be run within a single semester because they occur frequently and markets can be completed in about six weeks. Student traders also have access to many sources of information to take into consideration when making their investments. The markets demonstrate the adage that good information is the key to sound investment decisions. Information sources about Hollywood abound in the media and on the Web, and students have to determine which sources are better than others.

"For movies, there's almost limitless information, so the students have to be selective in how they gather and process it," Gruca said. "'Happy Feet' has lots of information that students can use to decide how well it will do. For instance, we know how well musicals do at the box office and how well animated movies do. And, based on last year's hit 'March of the Penguins,' we know how much people like penguin movies. The students' task is to put all of this information together and then act upon it in the market."

On top of that, he said forecasting the movie business poses a challenge for the students.

"Forecasting movie box offices is a very difficult problem because there are so many factors that go into their success," he said. "Who are the stars? Who is the director? What other movies are opening the same weekend? There's so much information that it leads to wide differences of opinion, but that's what makes for great trading. If everyone had the same opinion, there wouldn't be much of a market."

Gruca has been using movie openings in his marketing classes since 1998, usually studying two a semester. Past movies include the first "Harry Potter" movie, "How the Grinch Stole Christmas," "The Cat in the Hat," "The Legend of Sleepy Hollow," "Lost in Space" and "Enemy of the State." This fall, the other movie his students will trade futures on is "The Fountain," opening Nov. 22. The movie, starring Hugh Jackman and Rachel Weisz, is a little-publicized science fiction time travel thriller with a troubled production history. Gruca said one of the reasons he selected the movie is because its lack of publicity sets it apart from the hype machine that's been pushing "Happy Feet" since last summer.

"There's really no information on that movie so people have to bring their own information to the market instead of relying only on what they might find someplace else," Gruca said. That difference between the two movies is reflected in the size of the contracts on the IEM. While "Happy Feet" futures start at $100 million profit in the first month, futures for "The Fountain" start at just $10 million.

Gruca said that for students, there's more at stake investing in the IEM movies futures than just a grade: they get to keep whatever money they make, and whatever money they lose is real money.

Although trading is open only to students on the movie markets, the public can still watch the trading online at tippie.uiowa.edu/iem/markets.


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