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Experiential Learning Through Trading Agricultural Commodities Ted C. Schroeder, William I. Tierney Jr., and Harvey Kiser The authors are associate professor, professor, and associate professor, Department of Agricultural Economics, Kansas State University. Helpful comments from Andrew P. Barkley, Gary W. Brester, and two anonymous journal reviewers are gratefully acknowledged. An earlier version of this paper was presented at an Organized Symposium, "Simulated and Real Trading in Futures and Options Market Courses," at the American Agricultural Economics Association annual meetings, San Diego, California, 7-10 August 1994. Traditional courses in commodity futures markets have used simulations and paper-trading exercises to facilitate student understanding. In addition, simulations and other techniques have been used to teach various trading concepts. When using the technique of active student participation, however, students permitted to trade commodity futures contracts using student-invested money will greatly strengthen their understanding of the necessary analyses, concepts, value of information, and risks associated with trading. Students also learn how to manage a portfolio of investments. Disadvantages of this technique include potential for the fund to go bankrupt, and lack of generalizations that may be forthcoming from a single semester of trading. Key words: experiential learning, teaching simulations, teaching futures markets. Article <top> "Tell me and I'll forget. Show me and I'll remember. Involve me and I'll understand" (Carter et al., in Gentry, p. 9). Agricultural economics graduates enter a turbulent business environment that demands problem solving with less-than-perfect information. Problem-solving skills are difficult to instill in formal classroom settings because the environment facing real-world decision makers is complex. The agricultural economics profession takes pride in a problem-solving curriculum that is based on theory and applied to real-world problems. Agricultural economics graduates pursue careers that require relatively higher mathematical, computer, and economic skills than other college of agriculture graduates (Barkley), suggesting that they make decisions based upon analytical economics. We often assume that students who perform well in an academic environment also will excel in real-world economic analysis. However, this is not always true, and continued efforts must be made to help students learn how to apply their knowledge in making sound decisions after commencement (Hutchings and Wutzdorff). Because standard classroom environments are not always conducive to helping students transfer knowledge into real-world settings, alternatives should be considered. One method that has long been employed in natural sciences is the use of laboratories to provide students with hands-on experience in testing concrete theories and applying them to actual situations. Laboratory experiments complement, rather than replace, structured lectures. Journalism students often publish a university newspaper as part of their educational training. The use of laboratories and experiments in economic education has increased in recent years in attempts to get students actively involved in the learning process (Bartlett and King; DeYoung; King and LaRoe; Walker; Wells). One important difference between economic laboratories and those of some other disciplines is that economic laboratories often are simulated environments without tangible subjects, or the subjects are somewhat contrived. One way to introduce tangible subjects and to provide incentives for economic behavior among participants is through the use of money (Smith; Smith and Walker). Agricultural economics instructors bring real-world applications to the classroom in several ways. Applied lectures and problem sets are used to relate theories to ideas that students have experienced. However, if students are allowed to discover their own rules through active participation, learning is thought to be more effective and knowledge retained longer (Burns). This provides motivation for this article to examine the use and effectiveness of a particular exercise in experiential learning in agricultural economics. Specific objectives of this study are: (1) to discuss and compare benefits and drawbacks of students participating in a commodity futures market trading fund relative to other techniques of teaching futures markets, and (2) to determine the effectiveness of students learning commodity futures market trading, price analysis, and fund-risk management through a student-operated trading fund. The objectives of the student-financed trading course are that upon completion of the course, students will be able to effectively: (1) write, verbally present, and defend commodity market trade recommendations; (2) critically evaluate trade recommendations of others; (3) understand how futures markets operate; (4) monitor financial status of open market positions; (5) understand price risk faced by speculative positions and be able to distinguish levels of potential return and price risks across different trades or commodities; (6) know of and how to use alternative means of limiting risk in commodity futures trading including the use of spreads; and (7) learn how to manage a commodity fund pool. Experiential Learning <top> Business schools have recognized the value of and have used case studies in teaching for over 70 years (Lovelock). Simulations have been acknowledged as effective tools for teaching agricultural economics concepts in farm and agribusiness management (Babb; Dahlgran 1986, 1987). Internships, student boards of directors, case farm studies, and marketing teams are other examples of experiential learning activities used in agricultural economics curricula. When teaching commodity futures market trading, several different teaching techniques could be considered, including lectures, paper trading, market simulations, or investing actual money. Lectures are obviously important to provide basic information, but a pure lecture course generally does not provide active experiential learning. Lecturing is not considered a good substitute for experiential learning; therefore, lectures will not be addressed in this study. Paper trading has been used extensively at numerous universities to provide students with experience in monitoring one or a few commodity markets (Turner). These exercises have served an important role by giving students an incentive to monitor the market. If students were motivated to follow the market, it was expected that they would gain experience in market determinants and acquire a better understanding of the types and magnitudes of risk present in the market. Paper trading is likely most effective at helping achieve objective number (4), monitoring futures market positions, but less effective at attaining the other goals. Although the paper-trading activity has served a useful purpose, it also has several limitations, e.g., students may be exposed to only one or a few commodity markets, incentives to conduct analyses may be difficult to instill, financial risk and incentives to control risk cannot be fully appreciated without threat of actual financial losses, and trades are often not well defended. Some of these drawbacks may be reduced, depending upon the methods used by the instructor employing the paper-trading exercise. Market simulations also have been used to teach commodity futures marketing strategies (Trapp). Advantages of market simulations include the ability to expose students to a distribution of possible market events in a short time frame (Lev), ability to control the market environment to help teach a particular concept, and rapid feedback regarding the efficacy of selected strategies. Simulations are effective in teaching risk management strategies in extension settings where time constraints allow for teaching only a few concepts (Barnaby). Some of the limitations of this technique include: little time may be allowed between decisions to collect and interpret information, often at least some fabricated information and controlled information must be generated to provide to participants, fundamental market information provided must be somewhat contrived, and participants have an incentive to "learn how to play" the simulation which may not necessarily match the desired concepts. If monetary or other incentives are not present, lack of motivation, as well as ensuring that the participants make sound economic decisions, can be problems (Smith). Organizing students into commodity fund trading groups using actual money offers several advantages. People, especially economists, are highly motivated by monetary incentives (Carter and Irons). This incentive generates student interest and motivates students to perform activities which help to accomplish the goals of the course. Students appreciate the need for developing well-founded trade decisions and the opportunity to evaluate them ex post. By studying and reviewing numerous markets in a group setting, students become exposed to and gain broader understanding of how different markets interact and respond to varied stimuli without an artificial isolation of markets necessary in simulations. Other benefits accrue to students in the actual trading course, in that analysis of a commodity market prior to making a verbal trade recommendation is generally of considerable depth (more than most paper-trading or simulation exercises). Written and oral presentations of trade recommendations enhance students' communications skills, which, according to survey results, rank high as needs for agricultural graduates (Barkley; Harris; Litzenberg and Schneider). Also, cooperative learning among students possessing diverse strengths is effective in teaching economic concepts (Maier and Keenan). By investing their own money in a fund and making and monitoring actual trades, students discover the efficacy of each trade and learn how to manage the fund through direct participation. Investing their own money serves as substantial motivation for high levels of performance. In addition, peer pressure to provide accurate and sufficient information and to closely monitor market conditions promotes responsibility and accountability by individual teams. Often, trades that do not perform as anticipated contribute more opportunity for learning than those that perform well. For this reason, the instructor should allow the class to make "mistakes" (to the extent the entire balance of the fund is not unduly put at risk).1 1Knowing when or if to intervene as an instructor is not always apparent. Questions regarding rules and procedures need to be addressed as they arise. However, approved trades that have potential to put the fund balance at risk are more difficult to handle. Such trades require closer monitoring by the instructor. There are disadvantages associated with using real money and placing actual trades. First, there is a risk that the entire fund could become bankrupt prior to semester end. In the event of this potential occurrence, the instructor: (1) needs to have a contingency plan to deal with a fund that could have a negative balance, and (2) would need to determine what to do during the rest of the semester. Although this scenario is a possibility, the probability is small if prudent trades are made using mini-contracts and are monitored by the instructor. If the fund were to go bankrupt early in the semester, a great deal could be learned from the experience if the remainder of the semester was spent studying reasons for the bankruptcy and exploring ways to manage and reduce the probability. This remote possibility requires creative flexibility by the instructor. A second disadvantage of the real-money/actual-trades experiential learning technique is that time commitment by the instructor outside of class to coach and serve as a consultant to students is substantial. However, with a less-formal classroom format, this is partially offset by not having to prepare as many lectures. The course "costs" students the initial investment (of which some proportion will hopefully be returned at semester end)—which can deter students from enrolling. Finally, "wrong" signals can be sent purely by chance. For example, students may make money on an uninformed and otherwise poorly-conceived trade. Alternatively, they may lose money on a well-informed and comprehensively researched trade. A single semester may not afford sufficient time for students to experience broadly different market environments that will provide them with the general knowledge desired. If students do not accurately reflect on these possibilities, the wrong message can result. An instructor needs to be cognizant of this and ensure that the class correctly evaluates trades and understands elements that affect trade profitability. Often, trades must be held for a period of time (as opposed to simulations where consequences of decisions are realized in a matter of minutes), potentially reducing the connection between the decision and the result. Another disadvantage relative to some simulation exercises is that the trading course, as currently designed, is not helpful for experiencing forward pricing or hedging, only speculation. Without the ability to own a physical asset, hedging is difficult to practice in such a trading course. Tierney detailed how to set up an experiential student education commodity trading pool. The particular course evaluated in this article evolved from the original course designed by Tierney. This study measures student attitudes and learning as a result of their completing such a course. Course Background <top> Two commodity futures courses are offered at Kansas State University (KSU). One is a traditional futures course, similar to that taught through most agricultural economics departments, which uses textbooks and lectures to teach basics of commodity futures markets. This course is popular among departmental majors and is a service course to non-majors. In this article, the course will be referred to as the "standard futures course." The standard futures course is taught by using a paper-trading exercise in which students trade their own mock futures accounts using actual market prices, but they do not use money or place actual trades. The other commodity futures course, which is the focus of this analysis, is a seminar course in which each student invests a nominal amount of his or her own money ($100 to $300)2 into a commodity trading pool fund. The standard futures course or similar futures market exposure is a prerequisite to the trading course. The trading course is intended to supplement student exposure and understanding of futures markets. The class is divided into teams of roughly three students each. Teams must present at least two formal commodity trade recommendations to the class during the semester. Each team is required to provide a written report of the trade recommendation, which is made available to all students on the day of their trade presentation. The written report is to contain details of the recommended trade, a summary of the recommendation, and fundamental and technical analyses of the commodity market being investigated. The written report and presentation are a significant basis for the student's course grade. Other components of a student's grade include class participation and formal reviews of other students' trade recommendations.3 This course is referred to hereafter as the "experiential futures trading" course. 2The Commodity Futures Trading Commission allows the KSU educational pool to have up to $300 invested per student (Tierney). Depending upon the number of students participating and the desired amount of capital for liquidity and solvency, this may be the same amount per student or different amounts per student (with votes on trades weighted accordingly). In our experience, each has worked well. 3Individual students in each group can earn different grades from the average of the group on trade recommendations because of differences in peer evaluations of group members and self-evaluations. Otherwise brought forward for consideration. All group members participate and are graded in the presentation and discussion. Once the class has been organized and background lectures completed, the typical class meeting consists of one or two students moderating, using a parliamentary procedure. First business is a review of open positions and consideration of motions to alter open positions. The status of each trade is discussed as well as the cumulative status of the fund balance. Previously recommended trades that are not active can be brought to the floor for discussion. New formal trade recommendations are presented, discussed, amended, and voted upon by the group. Approved trades are ordered through a commodity broker. Trade recommendations not approved are open for discussion at future class meetings, but remain dormant unless otherwise brought forward for consideration. All group members participate and are graded in the presentation and discussion. The trades made by the experiential futures trading course and the financial results of the speculation for fall semester 1993 are reported in Table 1. The initial fund consisted of $4,100 ($100 initial investment from each of 40 students enrolled and $100 invested by an instructor).4 A total of 20 futures positions were entered into from 25 trade recommendations that were approved by the group (the difference represents trades that were ordered but never executed because of "market order" criteria that were not met). Numerous trade recommendations were not approved by the group.5 This included both formal, scheduled trade recommendations as well as informal, unscheduled, impromptu recommendations. Total brokerage commissions amounted to $995 for the semester. The balance of the fund returned to the investors after all positions were closed at semester end was $5,574.57. This resulted in an increase in student wealth and also sent a signal to a few students that making money by speculating was easy. 4There are potential tradeoffs regarding whether the instructor should invest in the fund. The instructor must be a general partner in the fund, whether an investor or not, for accountability. By investing, the instructor provides additional liquidity to the fund as well as giving the students a sense of camaraderie with the instructor. However, if the instructor cannot remain objective regarding trade performances and grades, then money should not be invested by the instructor. 5Exactly how many trade recommendations were not approved was not easy to determine. Some trades that were not approved one day were modified and approved another day, numerous impromptu trades were withdrawn by the introducers before formal voting, motions to modify trades (if not wanted by the proposer) could be counted either way, etc. Measuring Student Perceptions <top> Numerous evaluation tools could be used to measure student perceptions and learning as a result of the experiential trading course. Gosenpud reviewed studies that have evaluated experiential learning. He examined changes in cognitive learning, behavioral change, skill development, and attitudinal change. In the present study, an analysis of attitudinal changes and student evaluations is used to measure the effectiveness of the experiential futures trading course. In this regard, three instruments were used to collect information from students. During the first day of class, a survey/pretest was administered to all students enrolled in the course. The survey included questions eliciting background information regarding students' profiles and experiences with futures markets. Also included were Likert-scaled questions intended to measure students' perceptions and attitudes regarding futures markets. At semester end, the same survey was administered again to determine the extent of student attitudinal and perception changes. A third measure of student attitudes was ascertained through student evaluations of the course. Of 40 students enrolled in the actual trading course, 33 usable pre- and post-test surveys were available for analysis. The survey was intended to measure student attitudinal changes in three broad areas: (1) understanding of futures markets, (2) skepticism toward futures markets, and (3) perceptions regarding risks associated with commodity futures trading. Results of Student Surveys <top> Student pretest and post-test results are reported in Table 2. Students were initially somewhat familiar with futures markets in that they had completed the standard futures courses or a similar course. Despite this past experience, the futures trading experience changed student attitudes significantly. Only 12% of the students felt that they knew how to trade commodity futures in the pretest, whereas 88% felt they possessed this ability in the post-test. Similar improvements were realized in students feeling comfortable setting up an account with a broker. Student attitudes regarding futures market skepticism were not changed in the experiential futures trading course. At the beginning of the semester, 51% of the students started with moderate preconceptions that speculators and large traders manipulate futures markets. After a semester of trading futures markets, these students as a group maintained their skepticism. Why this was the case is not clear, other than the fact that nothing noteworthy happened in the markets during this time to sway student opinions, or perhaps the students' beliefs regarding futures markets were deeply entrenched and not readily changed. Those 40% of the students who were not initially skeptical remained this way. In terms of risk perceptions, the primary change in attitudes was characterized by students increasing their understanding of risks associated with speculation. The percentage of students who felt that speculation was risky increased from 73% to 87% following completion of the course. Risks associated with certain spread trades (Schwager, p. 506) were also recognized. Of course, temporal spread trades made in similar commodities or placed to capture crush margins, tend to be less risky than single open futures positions. Only 12% of the students felt that spread trades were as risky as simple buy/sell trades in the pretest. However, 51% felt this way in the post-test. Several spread trades were made by the class (Table 1), so students had first-hand experience with these types of orders. To fully appreciate the tension created by having actual money tied up in these markets, one must experience it. The experiential course is effective at conveying this understanding. Students in the course gained first-hand experience on how to manage risk. Students spent considerable class time setting stop-loss levels, trailing stops, planning loss-minimization strategies, studying price and profit targets, timing trades, and determining impacts of a trade on portfolio risk. Another measurement of the impact of the experiential trading course on learning was obtained from student course evaluations (Table 3). Students overwhelmingly reported that the course had current subject matter, the content was valuable to their area of interest, and that the breadth contributed insights they were able to apply in related fields. About 40% of the students felt that the course was relatively difficult. Eighty-four percent of the students rated the overall course as "excellent," and 100% of the students indicated that they would recommend the course to others. Student evaluations indicated that students as a whole felt the experiential course was valuable. Numerous written comments were collected from student evaluations. The most common comments included appreciation of (1) the "hands-on experience" offered in the course, (2) the use of money and real trades, (3) the opportunity to actively participate in management of the fund and in making trade recommendations, and (4) the chance to interact with faculty and students to make trade decisions. Recommendations for improvement included: (1) relaxing the bylaws to allow trades to occur without the entire class voting, (2) convening the formal class more frequently than twice per week and for more than two hours per week, and (3) insisting on a greater variety of trading strategies than simple buy/sell orders.
Table 3. Student Evaluation Summary of Experiential Futures Trading Course, Fall Semester 1993
Concluding Comments <top> Experiential, active learning can significantly enhance student understanding of economics. Agricultural economics and agribusiness graduates need to be able to apply analytical economics in solving problems. To accomplish this requires learning how to transfer knowledge and concepts into information to make informed decisions. Often decisions in a volatile business environment must be made rapidly and with limited information. Paper trading, simulations, and trading using actual student-invested money are methods used to provide students with experience in such environments. Motivation is high when actual money is on the line, and mutual interdependence among trading groups provides peer pressure and accountability. Standard futures courses are effective in teaching principles of futures markets and helping students understand how these markets operate. Experiential trading of commodities fosters opportunities to enhance students' written and verbal communication skills as well as to apply economic concepts to market analyses. Using actual money instills significant student motivation and an appreciation for inherent risks of trading commodity futures. Student responses to the course have been positive, and potential employers have favorably viewed those applicants who have participated in the course. Such courses are effective and valuable components for teaching particular aspects of the agricultural economics curriculum. References <top>
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