Spanish Real Estate Bubble: A Classroom Experiment

Multidisciplinary Journal for Education, http://dx.doi.org/10.4995/muse.2016.6377 Social and Technological Sciences EISSN: 2341-2593 Castelló-Sirvent (2016) http://polipapers.upv.es/index.php/MUSE/ Mult. J. Edu. Soc & Tec. Sci. Vol. 3 Nº 2 (2016): 185-202 | 185 Spanish Real Estate Bubble: A Classroom Experiment Fernando Castello-Sirvent [email protected] ESIC, Business and Marketing School - EINTLab Research Avda. Blasco Ibáñez, 55, 46021 Valencia, Spain. Received: 2016-01-14; Accepted: 2016-06-22 Abstract The European Higher Education Area (EHEA) requires development of teaching methodologies that encourage active participation by students in the autonomous learning process, taking the figure of the professor as the mediator. On the other hand, the economy is a fundamental aspect in today’s society insofar that it contributes to explaining the behaviour of individuals. In this sense, the experimental economy applied in lecture rooms is presented as an innovative educational procedure that is perfectly adapted to university teaching, since it facilitates acquisition and consolidation of curricular knowledge and favours the development of capabilities by students, whilst at the same time improving the quality of teaching and has a positive impact on the interest students have in the subject. This paper describes the application of an economic experiment as an active learning method to prove the mechanisms used to set prices. The experience took place at the ESIC Business and Marketing School Valencia university centre, within the subject of “Spanish Economy” in Official Business Management and Administration degrees and in Marketing and Sales Management degrees. The starting point for this experience was the work by Radim Boháček (2002), adding changes aimed at empirically explaining inflation, the real estate bubble and subsequent economic crisis in Spain. The obtained results prove that this educational experience favours learning of the economic concepts students study, and stimulates proactive interest in the subject. From the obtained results a second experiment is proposed in order to consolidate concepts concerning price setting mechanisms in the presence of intervention by the Public Sector (taxes and subsidies) or establishing incentives that model collusive behaviour leading to situations where market offers are concentrated in oligopolies. Keywords EHEA, autonomous learning, Spanish economy, experimental economy, pricing, real estate bubble Multidisciplinary Journal for Education, http://dx.doi.org/10.4995/muse.2016.6377 Social and Technological Sciences EISSN: 2341-2593 Castelló-Sirvent (2016) http://polipapers.upv.es/index.php/MUSE/ Mult. J. Edu. Soc & Tec. Sci. Vol. 3 Nº 2 (2016): 185-202 | 186 1. Introduction The implementation of the European Higher Education Area (EHEA) has transformed how knowledge is transmitted. In fact, one of the main goals of the EHEA is to improve the quality of university teaching by focusing its attention on the adoption of competencies among students (Cano, 2008). The incorporation of the new university system is an attempt to establish a dynamic, active and flexible training strategy to ensure students are able to carry out autonomous learning (Whitehead, 2008). In this way, it is possible to develop the skillsets demanded on the current changing, competitive and complex employment market (Hunt, Eagle and Kitchen, 2004). For this reason, universities must drive innovative experiences in teaching-learning processes in order to combine consistently the generic, overarching and specific skills that facilitate professional guidance to enable graduates to enter the working arena successfully (Roger et al., 2016). At this point, it is appropriate to highlight that the skill acquisition process is more successful if it takes place through teamwork instead of resorting to the traditional transmission of knowledge (Exley and Dennick, 2007). In this sense, the EHEA encourages methodologies driving the development of competencies in which co-operation and teamwork constitute fundamental method for teaching and learning, as the learning so acquired is considered to be deeper and longer lasting (Gil et al., 2006). The conventional methodology based on the transfer of knowledge must precisely be replaced by a project contemplating the acquisition of skills and aptitudes based on selflearning (Martín et al., 2014). In other words, students must become the protagonists of their own learning. To do so, it is of vital importance to conduct practical sessions and debates in the classroom to enable students to develop an intervention at both personal and team level materialized in the gaining of the skills needed to approach their professional career successfully (De Juan, González, Parra, Kanther and Sarabia, 2008). The present article explains the different stages carried out to draw up a project for educational innovation based on the development of an economic experiment within the classroom. The experiment is established on the basis of that proposed by Boháček (2002) by introducing a series of different alterations enabling the process and the outcomes to approach a large part of the conclusions drawn from the theoretical corpus of the subject within which this innovation project is housed. Multidisciplinary Journal for Education, http://dx.doi.org/10.4995/muse.2016.6377 Social and Technological Sciences EISSN: 2341-2593 Castelló-Sirvent (2016) http://polipapers.upv.es/index.php/MUSE/ Mult. J. Edu. Soc & Tec. Sci. Vol. 3 Nº 2 (2016): 185-202 | 187 Thus, co-operative learning is seen in this experiment as a very interesting option to organize the teaching processes and the acquisition of skillsets. Nonetheless, it is important to point out that it is not enough to bring a series of students together to ensure co-operative effort. The success of teamwork lies in understanding how people learn, process and use the information provided to them (Estrada et al., 2014). The goal of this experiment involved facilitating autonomous learning by students in the context of the curriculum for the subject of “Spanish Economy” as part of its integration into the syllabus for the degrees in Business Management and Sales & Marketing at ESIC Business and Marketing School. These official qualifications are awarded through the Miguel Hernández University in Elche. The innovation project attempted to make more accessible a subject framed within the domain of applied economics and habitually distant and inaccessible for second-year students. This economic experiment involved 36 students, of whom 8 were Erasmus exchange students from a German university. Starting from the design of the pedagogical experience, consideration was given to achieving higher levels of development among students in the subject’s general and specific skills, making it possible for the learning outcomes established by the university to arise in a comprehensive and more satisfactory manner for students. 2. Description of the teaching innovation project The goal of the innovation project was to achieve the articulation of a practical learning method whereby students could verify, in addition, the validity of part of the economic theory studied in the subject. In particular, one important goal involved analysing price formation and, in the specific case of the Spanish property market, assessing the role of regulators in the design of incentives. It was also fundamental for participants in the experiment to be able to make it tangibly apparent how the various supply-side restrictions (land regulations) and, on the demand side on the other hand, the effects caused by the monetary policies on low interest rates applied by the European Central Bank (ECB) that ultimately contributed to the generation of our real estate bubble. Multidisciplinary Journal for Education, http://dx.doi.org/10.4995/muse.2016.6377 Social and Technological Sciences EISSN: 2341-2593 Castelló-Sirvent (2016) http://polipapers.upv.es/index.php/MUSE/ Mult. J. Edu. Soc & Tec. Sci. Vol. 3 Nº 2 (2016): 185-202 | 188 Thus, the elements involved in the formation of relative prices, i.e. why one item should be worth more than another, are crucial for students to be able to understand not only the process of inflation in the Spanish property sector but also, on a wider scale, any distortion in market equilibrium. Starting from the paper published by Radim Boháček (2002) and the variants proposed by Rey-Biel (2015), an economic experiment was designed around the exchange of various legumes (beans and chickpeas) that was subjected to three major conditions: a) Contingency: The amount of incentive received by each participant must depend at least on the decision taken by the subject involved. b) Dominance: Changes in the subject’s satisfaction with respect to the experiment had to be due, fundamentally, to changes in the amounts of incentive received. c) Monotonicity: A higher incentive payment had always to be preferred by students to a smaller payment, and subjects must not become satiated. The sequential design of the structure of the experiment proposed is presented below. Multidisciplinary Journal for Education, http://dx.doi.org/10.4995/muse.2016.6377 Social and Technological Sciences EISSN: 2341-2593 Castelló-Sirvent (2016) http://polipapers.upv.es/index.php/MUSE/ Mult. J. Edu. Soc & Tec. Sci. Vol. 3 Nº 2 (2016): 185-202 | 189 Table 1. Structure of the economic experiment PHASE 1 A) NORMATIVE STAGE - Share-out of the initial provision of beans and chickpeas, and of the paper records to all participants - Explanation of the methodology (introduction) How to carry out exchanges, how to record the timeline annotations on the paper record provided, the agent making the exchange and the exchange rate B) RANDOM CONTROL STAGE (Duration: 5’) C) EXCHANGE STAGE (Duration: 15’) - Free exchange between any pair of agents with monitoring of the timeline and annotations proposed with respect to the methodology PHASE 2 A) NORMATIVE STAGE - Monetary injection of more chickpeas to leave the total proportion on the market at 1/6 - Explanation of the methodology (winner’s rules) B) RANDOM CONTROL STAGE (Duration: 5’) C) EXCHANGE STAGE (Duration: 15’) - Free exchange between any pair of agents with monitoring of the timeline and annotations proposed with respect to the methodology PHASE 3 A) NORMATIVE STAGE - Explanation of the methodology (variation) B) RANDOM CONTROL STAGE (Duration: 5’) C) EXCHANGE STAGE (Duration: 15’) - Free exchange between any pair of agents with monitoring of the timeline and annotations proposed with respect to the methodology Source: Own production Multidisciplinary Journal for Education, http://dx.doi.org/10.4995/muse.2016.6377 Social and Technological Sciences EISSN: 2341-2593 Castelló-Sirvent (2016) http://polipapers.upv.es/index.php/MUSE/ Mult. J. Edu. Soc & Tec. Sci. Vol. 3 Nº 2 (2016): 185-202 | 190 In PHASE 1A, it was established that each individual could take an initial provision of red beans and ordinary chickpeas pre-established in different sacks distributed at random and contained in a box. This initial provision presented, for the class as a whole (the market), an uneven proportion of 1/3, in which 3 chickpeas were presented for each bean. In this way, some economic agents (students) might find themselves with a proportion of 2/1 in their initial provision; others with a proportion of 5/1; and others with a proportion of 1/6. The total amounts of legumes contained in each bag were the same for all students, but not the proportion between beans and chickpeas. Distribution in the classroom was at random. In order to resolve the contingency condition, three Exchange Stages (1C, 2C, 3C) were designed with the aim of allowing students to perform unlimited free exchanges with their classmates. The moment at which the market was declared exhausted was when it was no longer possible to engage in any further transaction as all participants were satisfied with the amounts exchanged and, in consequence, with the combination of beans and chickpeas retained. In order to resolve the dominance condition, three Normative Stages (1A, 2A, 3A) were designed for the purpose of providing a sequenced explanation of the methodology and the rules governing the experiment so as to furnish participants with tools and criteria to enable them to increase their own utility. In PHASES 1A and 2A, the information presented was deliberately incomplete in order to trigger a design that would constrain the behaviour of individuals. In order to resolve the monotonicity condition, a final incentive was determined for the ‘most competitive’ economic agent. This consisted in a 50-euro gift voucher from a wellknown department store. Although all the participants knew about the final incentive, they were gradually informed through PHASES 1A, 2A and 3A about the specific rules that would enable them to be ‘more competitive’. Similarly, and in view of the possibility of fraud being perpetrated by participants, three Random Control Stages (1B, 2B, 3B) were designed. In each of the control stages, the lecturer inspected the data sheets and the balances (beans and chickpeas) of three students, chosen at random, and their most recent counterparties, i.e. the last three students with whom agreement had been reached for a transaction with the student being inspected. In this way, a total of 9 students were inspected at random (25% of the class) along with their Multidisciplinary Journal for Education, http://dx.doi.org/10.4995/muse.2016.6377 Social and Technological Sciences EISSN: 2341-2593 Castelló-Sirvent (2016) http://polipapers.upv.es/index.php/MUSE/ Mult. J. Edu. Soc & Tec. Sci. Vol. 3 Nº 2 (2016): 185-202 | 191 final counterparties for each immediately preceding exchange phase, so the possibility of a check affected practically 50% of the market. This inspection and control condition is similar the function performed by the Public Exchequer facing tax fraud in a real market. The goal in our case, as for the Tax Office, involved inhibiting opportunistic behaviour leading to the exploitation of the regulatory cracks in the game, thus preventing the generation of distortions and externalities. In the event of fraud being detected, the penalty meant that both the student under inspection and the counterparty would lose their stock of legumes and would cease to participate in the game, thus making it impossible for them to win the final prize. It should be indicated that any inaccuracy in the amount noted between a pair of economic agents or any mismatch in these amounts, or in their stock of legumes with respect to the balance noted at the moment of the inspection, would imply the expulsion of both participants from the game. It must be remembered that Student A in the last exchange of a phase with Student B should have noted down the same amounts as Student B but in the reverse order, and both should coincide in their tally of the real balances of beans and chickpeas, for both A and B. We must stress that there were no mistakes in the tallies kept and we can therefore infer the high level of attention given by participants during the experiment, as any carelessness would have implied a severe penalty. The design of the experiment also mitigated the impact that might have been caused by the economic agents becoming sated through tiredness or boredom in view of the repetitive mechanics of the game and this was possible through a flexible, functional design with a total duration of less than 75 minutes. During PHASE 2A, the lecturer, acting as a Central Bank, flooded the market with chickpeas by raising the monetary supply of chickpeas to create, on aggregate and analysing the market as a whole, a disproportion of 1/6 (beans/chickpeas). The share-out was fair and proportional, with each student receiving the same number of chickpeas. Due to the intrinsic characteristics of this design, a student who had inferred an equilibrium price of 1/3 prior to the monetary injection passed to an inferred price of 1/6. During PHASE 2A, the lecturer explained the winner would not be the participant who, as most of the students had guessed, had the largest number of beans and chickpeas (added together), but rather that the outcome would be decided by multiplying the number of beans Multidisciplinary Journal for Education, http://dx.doi.org/10.4995/muse.2016.6377 Social and Technological Sciences EISSN: 2341-2593 Castelló-Sirvent (2016) http://polipapers.upv.es/index.php/MUSE/ Mult. J. Edu. Soc & Tec. Sci. Vol. 3 Nº 2 (2016): 185-202 | 192 by the number of chickpeas. Thus, participants were able to infer that they should seek exchanges enabling them to achieve a certain equilibrium between beans and chickpeas because, if a player managed to accumulate a lot of beans but few chickpeas, for example 6x2 = 12, and another achieved a degree of balance between beans and chickpeas, for example 4x4 = 16, then the second one would beat the first. During PHASE 3A, the lecturer introduced a further modification. By then all the participants were aware of the disproportion that existed between the different legumes; they were not able to specify it in numerical terms but they were able to gauge it. At the end of PHASE 3C, the pair of participants involved in a last exchange that had been recorded as the final exchange representing the highest relative prices would obtain from the Central Bank an additional 50 beans and 50 chickpeas each, which would be added to their stock at that moment and the game would then come to an end and the final tally would be drawn up (multiplication of beans and chickpeas of all the participants) to determine the winner. 3. Methodology A stopwatch was projected in the classroom to give an accurate reference of the time in minutes and seconds, programmed in three blocks of 15 minutes each, to provide the timeline during the exchanges in PHASES 1C, 2C and 3C for inclusion on the control sheets distributed together with the initial provision of legumes. Each participant had to record the following information on his or her data sheet for each exchange: a) The PHASE in which it took place (1C, 2C, 3C) b) The exact moment it took place (minute and second) c) The player with whom the exchange was made 1 d) The swap ratio (number of beans and the number of chickpeas exchanged 2 ) 1 The participants were assigned numbers from 1 to 36 and noted the specific code assigned to their respective counterparties in their different trades. 2 The swap ratios admitted any proportional fraction in the form 2/5; 6/7; 9/4; representing 2 beans for 5 chickpeas, 6 beans for 7 chickpeas or 9 beans for 4 chickpeas. In this way, the exchange rate for a bean can be calculated by dividing the denominator by the Multidisciplinary Journal for Education, http://dx.doi.org/10.4995/muse.2016.6377 Social and Technological Sciences EISSN: 2341-2593 Castelló-Sirvent (2016) http://polipapers.upv.es/index.php/MUSE/ Mult. J. Edu. Soc & Tec. Sci. Vol. 3 Nº 2 (2016): 185-202 | 193 e) The balance at the end of the trade (how many beans and how many chickpeas) Bearing in mind the market’s dimensions (36 participants trading with each other, all standing up) meant that it was difficult for players, and costly in comparative terms, to carry out a complete, overarching co-ordination of all the members on the market because, if they had tried to, they would have missed the chance to make more and better exchanges. At the end of PHASES 1C, 2C and 3C, the lecturer asked the participants to shout out the ratios of the last trades they had made on the market. In other words, the exchange rates for supply and demand in the last operations between pairs of students. This gave rise to ratios varying between 1/1 for the exchange of one bean for one chickpea and 1/8 for the exchange of one bean for 8 chickpeas. As these exchange rates were shared aloud, participants could become aware of the inflationary process that was being created on the market, even though this would not have been apparent to them until that moment due to the bias caused by the asymmetry in the information. 4. Outcomes At the end of PHASE 1C, it was possible to see that inflation exceeded real scarcity on the market. While the proportion in the initial provision was 1/3, by the end of PHASE 1C, the closing prices between supply and demand were 1/3, 1/6 and 1/8. This indicates the existence of volatility due to the fact that, in a non-organized market, information asymmetry meant that not all the participants were aware of the last price traded and, in consequence, they were ignorant of the ‘best contractual position’ that would allow them to buy chickpeas or sell beans, and vice versa. numerator. In the preceding examples, the price of a bean would respectively be 2.5, 1.17 and 0.44 chickpeas. Analogously, the price of a chickpea can be calculated by dividing the numerator by the denominator in the swap ratio indicated above. Using the same examples, the price of a chickpea would respectively be: 0.4, 0.86 and 2.5 beans. Multidisciplinary Journal for Education, http://dx.doi.org/10.4995/muse.2016.6377 Social and Technological Sciences EISSN: 2341-2593 Castelló-Sirvent (2016) http://polipapers.upv.es/index.php/MUSE/ Mult. J. Edu. Soc & Tec. Sci. Vol. 3 Nº 2 (2016): 185-202 | 200 In terms of the analysis of the outcomes from the questionnaire posed to the students following this innovation project, the results suggest a very positive assessment of this kind of experiment in the classroom. Training actions of this type are highly appreciated by students as they enable them, through practice (tacit knowledge), to approach a reflexive iteration of the curriculum’s theoretical corpus (express knowledge) and finally crystallize in a deeper level of understanding of the mechanisms giving rise to this learning process based on experience (Nonaka and Takeuchi, 1995). The tabulation of the qualitative outcomes presented in the last section of the questionnaire which allowed participants to express themselves freely and openly showed great consistency among a large number of students regarding their assessment of the concertation and collusion strategy throughout PHASE 3C. With all the cautions inherent to a qualitative methodology (Gutiérrez Brito, J., 2009), we must divide the evaluations given by the participants themselves with respect to their respective oligopolistic strategies into two main schools of thought. On the one hand, students who deemed their behaviour reprehensible, even though they had engaged in it; and, on the other, students who openly evaluated it as honest and defensible. With respect to the motivations of the first group, as the virtually unanimous justification of their behaviour, they alleged they were taking advantage of a void in the system, in the design of the game, and the non-existence rule prohibiting such collusive behaviour. The second group, on the other hand, argued in favour of the exploitation of market synergies, and the competitive advantage represented by the size and volume of transactions acting around a central operator or group of economic agents. While the first alleged a vulnerability in the game design, the second group found a competitive opportunity. Curiously, all the Erasmus students were among the second group. Qualitative observations of this type led us to propose the future design of new economic experiments inspired by the experiment explained in this paper. In this case, experiments offering greater relevance to the Public Sector, with the introduction of subsidies and taxes, with the aim of profiling efficient mechanisms on highly regulated markets with barriers to access on the supply side, such as the electricity market (Staropoli and Jullien, 2006). Multidisciplinary Journal for Education, http://dx.doi.org/10.4995/muse.2016.6377 Social and Technological Sciences EISSN: 2341-2593 Castelló-Sirvent (2016) http://polipapers.upv.es/index.php/MUSE/ Mult. J. Edu. Soc & Tec. Sci. Vol. 3 Nº 2 (2016): 185-202 | 201 Similarly, in the assessment questionnaires used in the classroom for the result of the teaching innovation activity, we propose the future quantitative tabulation of arguments in favour and against the oligopolistic behaviour discovered by the participants in the course of the experiment, and an increase in sample so as to allow the performance of discriminating quantitative analyses in the light of social and demographic parameters such as gender, original qualification or nationality of the student. References Bohacek, R. (2002). A Market-Clearing Classroom Experiment. Southern Economic Journal, 69(1), 189. DOI: http://doi.org/10.2307/1061564 Cano, Mª E. (2008). La evaluación por competencias en la educación superior. Profesorado. Revista de curriculum y formación de profesorado, 2008, vol. 12, nº 3, p. 116. De Juan, M. D., González, E., Parra, J. F., Kanther, A. y Sarabia, F. J. 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