The ups and downs of pretend investing

UpDown logo

Tess Vigeland: There are scads of websites where you can get up-to-the-minute stock quotes and investment advice. And then there are sites that let you pretend to invest -- sort of like fantasy league baseball for finance geeks. UpDown.com is one of them. It's risk-free since the money's not real. But unlike other fantasy trading sites. you might be able to earn a little cash if you're smart or just lucky.

Marketplace's Sean Cole reports.


Sean Cole: In the summer of 2006, a Harvard Business School student from Germany named Michael Reich was hanging out in his dorm room. He'd been enrolled only two weeks. And just like that, he had an idea for a new company.

Michael Reich: Yeah, I was actually sitting at my desk reading stock market news and at the same time having my Facebook account open. And that's when I thought, "Hey, how could you marry this concept of social networking with investing?"

Cole: You put your chocolate in my peanut butter.

Reich: That's right.

About a year later -- with a couple of classmates and some seed money from an investor -- he launched UpDown.com. And now the site has 400,000 members and it makes its money from advertising.

It looks pretty much like any investment site. There's a graph of how the markets are doing. Some news headlines. And if you open an account, UpDown gives you a million virtual dollars to pretend invest. Then it tracks how much you would have made or lost if you had actually invested.

Reich: So this is me today. I gained 0.1 percent in my portfolio. I made some money on Ford, because I shorted Ford and it seems that Ford isn't performing so well today.

You can also link with other users on the site, a la Facebook, and gauge your performance against theirs.

Reich: So we see here that I'm definitely not the best. Zachary seems to be doing the best among my friends. Up 18 percent since start.

Cole: Damn you, Zachary!

But the most interesting thing about UpDown is that it pays its best performing users every month. The number one virtual earner gets 500 real dollars. The second best gets $250. The third gets a hundred bucks. In fact, anybody whose portfolio ends up higher, percentage-wise, than the market average that month gets a little money.

Reich: I think we pay out one cent to everyone who beats the market.

Cole: That seems like more trouble than it's worth, my friend.

Reich: Yeah we only allow people to get a pay out once they've reached, I don't know, 50 cents or a dollar. So it's more a token of, "Hey, you know we value that you played in the contest and that you beat the market."

For instance, Eric Cahan an UpDown user here in New York, has so far earned...

Eric Cahan: I think, $11? But I don't even know how to get the money.

I asked him to show me his portfolio. And he's done pretty well.

Cahan: So I'm up 39.4 percent since I started.

Which was three years ago. He's invested in the real market, too. But he uses UpDown mainly to take the risks he doesn't dare take in the real world.

Cahan: I'm less cautious, obviously. I'm willing to put $100,000 into something that I don't fully understand what that they do.

Cahan's only criticism about the site is that it should pretend tax you on the money you pretend earn. That would be more realistic, he says.

But Stephen Figlewski, who teaches futures and options at NYU, is a little skeptical about the contest element.

Stephen Figlewski: Up, down. Like that? UpDown?

Cole: Yeah.

Figlewski: Dot-com?

Cole: Mhmm.

We pulled up the site in his office. Overall, he says it looks like a good learning tool. But he says competing against other investors can teach bad habits that a novice might transfer into real life.

Figlewski: If we think, "Well, I'm in competition with 50 other people and I've gotta be the best out of 50, the way to do that is to find some wildly speculative stock and plunge as much as I possibly can and then be lucky." That's a rational strategy. You swing for the fence and hope you hit a long home run, because that's the only way you can possibly win. That's not the way one should invest.

Michael Reich is aware of that worry and says UpDown tries to discourage that kind of behavior. For instance, it only lets users put $20,000 into any given stock. At the same time, he says, UpDown might be a good confidence booster for folks who are overly nervous about the real market.

Reich: You're investing maybe too little or not aggressive enough, because it's your real money and you're really scared about your money. Whereas maybe that would be the right decision. Some people it might be liberating and empowering to just trade and not worry about the money that they're losing.

I asked Reich if he's invested in the real market. He says he used to be, but not right now. He has to devote his extra money to paying off student loans.

I'm Sean Cole for Marketplace Money.

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