Say you're an investment analyst at a large Bay Street firm. On this day news hits that Company A has struck a cash and stock deal to purchase Company B. You must evaluate the odds of the acquisition succeeding, forecast the future price of Company B's shares, and develop an investment strategy for your clients.
This is just one of the many scenarios that students at the University of Toronto's Rotman School of Management face when using the Rotman Interactive Trader, a computer software application that simulates a stock exchange and allows participants to trade virtual financial securities with one another.
"Like a flight simulator for pilots, this simulation-based practice trains participants to deal with risks and crises before experiencing them with clients' money," says Tom McCurdy, a Rotman finance professor and academic director of its Financial Research and Trading Lab. Several members of the lab team, including Dr. McCurdy, designed the simulation.
A growing number of business schools are incorporating simulations with more traditional learning methods. Simulations allow students to apply knowledge gained from textbooks, classroom lectures and case studies to operate virtual businesses, invest in ersatz financial markets and design fantasy marketing strategies.
This type of hands-on learning exercise provides students with immediate feedback on the decisions they make, often motivating them to try again and do better, Dr. McCurdy says. It also allows them to put into practice the theory and concepts they learned in the classroom. Rotman leases the RIT simulation and accompanying cases to about 25 universities worldwide.
Students also work on the Rotman Portfolio Manager, a simulation that allows them to manage a fantasy portfolio of stocks, bonds, futures and options using real-time market quotes. Students are graded not just on the profits or losses they incur when playing the simulations, but also on their ability to formulate sound investment strategies and explain them.
Simulations are "a very creative and engaging way to get students to learn about the concepts which they oftentimes find dry in the classroom setting," says Juliet Zhu, marketing professor at the University of British Columbia's Sauder School of Business. This generation of students has grown up working and playing on computers, and simulations engage and motivate them better than some traditional methods of instruction, she says.
Students in her marketing class play the Markstrat game. Students are placed in teams and tasked with managing a virtual company. The teams compete against one another to manage a company's products, design new ones, decide how to price and promote them and make other marketing decisions that actual companies would make. The simulation then tells students how successful their strategy has been based on the virtual company's share price, sales, market share and customer satisfaction. Students tend to get very competitive, Dr. Zhu says. "It's like they are real companies."
There's little doubt that simulations are popular with students, but there can be drawbacks, too, professors say. One challenge is to get students to use concepts and theories learned in class, rather than simply trying their luck.
While simulations play an invaluable part in business education, particularly in MBA programs, they shouldn't be used as a substitute for other traditional teaching methods, says Mark Vandenbosch, marketing professor at the University of Western Ontario's Ivey School of Business. "I don't think you can teach an entire course on it," Dr. Vandenbosch says. "You need all aspects."
The SABRE simulation that Dr. Vandenbosch uses for his marketing students makes up about 5 per cent to 10 per cent of a course and functions as a capstone project, he says. SABRE is similar to the Markstrat game.
Simulations also shouldn't try to compete with video games, Dr. Vandenbosch says. SABRE requires students to spend more time reading reports than interacting with a computer, he notes. But he sees many new products being introduced that have students interacting solely with a computer. And some try to explain concepts that can be better taught in a classroom, he believes.
Business simulations have been around for decades but they are becoming increasingly popular and sophisticated. Harvard Business Publishing offers 14 simulations that cover all aspects of business education, including operations, organizational behaviour, strategy, finance and marketing. Spain's IE Business School has developed more than 100 multimedia products, including World Oil Prices, a simulation that aims to teach students about supply and demand in the global oil market.
Special to The Globe and Mail