The game of Monopoly has its roots solidly planted in the two other recent moments in history when technology experienced an evolutionary leap forward - the late 1800’s and first quarter of the 1900’s. Given my belief that we are experiencing another one of those evolutionary leaps and dealing with so many of the same social and economic issues, I thought it worth taking a look at what the game can teach us about society, behavior patterns and the economy.
The History Let me be clear. I don’t claim that there is anything original about connecting the game of Monopoly to economics and unfettered capitalism. To do so would be an admittance of ignorance about its origins. In actual fact, the original game was specifically intended as a tool for teaching the philosophy of Henry George as laid out in his book Progress and Poverty (1879). The premise is that private land ownership is a destructive principle and it came to be known as Georgism, the foundation of the United Labor Party in 1886. As you can imagine, it was very unpopular among wealthy landowners, not the least of which was the Catholic Church, who ruled it “worthy of condemnation”.
The game, originally called The Landlord’s Game (1906), was the brainchild of Lizzie Magie. All of the key features of the game, the ones that make it immediately recognizable, such as the square board with properties along the edge plus Chance, Electric Company and the Luxury Tax were included in her version. It became something of a movement in its own right as wealth disparity was escalating once again into the 1920’s. If you want to read more about the history of the game, I highly recommend reading this beautifully written story in Harper’s Magazine. Rather than feebly attempt to replicate Christopher Ketcham’s version, let’s move on to what I believe we can learn about behaviors and the economy from the three strategic phases of the game.
The Game What interests me most about Monopoly is how its social dynamics serve as a beautifully simple metaphor for the social dynamics driven by an economic lifecycle. In fact, it interests me so much that I am working with organizational behavior specialist, Dr. Kyle Lewis, on a research study to examine its impact on individual behaviors and group dynamics.
While we tend to think of Monopoly as a game of pure luck, it is actually a strategy game. When you first sit down to play and the money is evenly distributed, everyone is excited. Each player chooses their favorite piece, whether its the car, puppy or thimble doesn’t really matter, but in that moment it feels as though it does. You neatly lay out your money, organized by denomination. Perhaps you tuck it gently under the board in front of you. Every player is engaged.
That’s when Phase One of the game begins. During this phase, you want to gather as many properties as possible. If you wind up in Jail, you should pay your fine immediately so you can continue to gobble up properties before your opponents do. This phase is essentially a race to control as many of the income generating assets as possible. Do whatever you must in order to accumulate properties, even if it means immediately mortgaging them in order to free up capital for additional purchases. Beyond the “Buy Everything” strategy, this phase is mostly about the luck of the dice. Very quickly, players either become disheartened by “those crappy dice” or emboldened by their “superior strategy”. The end of Phase 1 is interesting in that those in the best position are typically the ones with the least cash on hand. In other words, they are heavily invested. Of course, leverage isn’t part of the game, but if it were, I could see a strategy called “Peloton” being very popular among the pros.
Phase 2 begins when roughly half the properties have been purchased. This phase is characterized by the frenzy of activity as players negotiate trades in order to position themselves for the remainder of the game. It is all about location. The goal is to monopolize property groups in the most valuable parts of the board, namely those just ahead of Free Parking and, to a lesser degree, those just after it. Of course, the strength of your negotiations are severely affected by what you were able to accumulate in Phase 1. When all properties have been acquired and the pace of transactions grinds to a halt, Phase 2 is over.
As Phase 3 begins, the fate of the players is all but set, even if three of them remain naively optimistic about their chances. Sure, your opponents might string together a few unlucky rolls, but the likelihood of someone who is poorly positioned as Phase 3 gets underway actually winning, are slim. This is the primary reason Monopoly is ranked 10,870th (below “Go Fish” and “Old Maid”) among game aficionados. While the game may go on for hours more, everyone basically knows who is going to win very early on and some of the players may be eliminated hours before the others. Whereas in Phase 1 you wanted to remain active, paying the fine to get out of Jail immediately upon entering, in Phase 3, the strategy is exactly the opposite. Every roll of the dice is risky, so you do what you can to avoid activity. Nearly every transaction originated by you will be to your detriment. So you avoid originating transactions. If you wind up in jail, stay as long as possible. As a result, what was once a frenzy of activity, has become a monotonous series of dice rolls. Those who have look to protect it and those who don’t are just trying to stay alive as long as possible.
Now, think about what happens when a player’s stack dwindles and their ability to generate revenue is limited. They begin to lose interest in the game. They are no longer engaged. The money, the property, the rules, psychologically they all shift from possessing real value to representing fantasy. Those neatly stacked piles now lie haphazardly and unattended. They are more likely to get up for a soda or slice of pizza. “Just roll for me when it’s my turn,” he mutters as he gets up from the table. While the other players are still actively involved, particularly the leader, he has disengaged. He has broken the fourth wall as they say. Gone is the suspension of disbelief. Slowly but surely this will happen to all but one player at the table. Eventually, all that remains is a memory of what could have been. Even the winner eventually must come to grips with the fact that she possesses little more than colorful pieces of paper.
I believe the global economy is in Phase 3. Sure, houses can still be built or swapped out for hotels, but the frenzy of activity is over. Those who have, are taking as little risk as possible. Those who don’t, have become disengaged, slowly coming to the realization that the odds are stacked against them. Even infusions of cash do little more than merely extend the game, for every transaction exaggerates the disparity adding to the wealth of the game’s leader who simply socks it away. No new transactions, no investments. Just one player building their savings while everyone else is reduced to financial ruin, and the game is over. The only way to reengage everyone is to begin the game again, from scratch. If you think about it, that’s how it happened in those two previous periods in recent history.
“The greatest astonishment of my life was the discovery that the man who does the work is not the man who gets rich.” Andrew Carnegie
I was asked this week whether I was surprised by what happened in Japan. Well, I’m rarely surprised by short term price action, not because I’m so brilliant, but rather because surprise requires expectations. Since I know I can’t predict short term price action, I rarely set expectations and so I’m rarely surprised by it. Having said that, I have been calling for a stronger Yen since I set 101.20 as my take profit target in the Trade Write-Up for JPY 1 on January 15th and reiterated that view post negative rates in “Odometer Readings and Negative Interest Rates” on February 4th. The rationale was, and is, that the issues we are grappling with are global. The U.S. is not unique. It can’t somehow turn things around while every other economy is on the brink of disaster. Therefore, interest rates, particularly in the long end, could not diverge as the markets were suggesting. Since currency moves within the developed markets are simply reflections of interest rate differentials, no, I’m not surprised that negative rates haven’t led to a weaker JPY and no, I’m not surprised that USD/JPY is fast approaching 100.
Oil's Rally is Bad News for Oil
As much as some want oil to go higher and stay there, absolutely nothing has happened in the last few weeks that would suggest the rally is warranted. We have not seen a spike in demand from anywhere. Even if you want to use China’s “credit boom” as a reason to be bullish, don’t confuse an injection of cash that goes straight to speculative markets for a sustainable increase in demand. The spike in oil, emerging markets, and especially iron ore are not cause for optimism, but rather evidence of a flawed transmission mechanism and the inability to drive cash from the financial economy to the real one. If speculation drives oil prices up enough to encourage suppliers to respond by producing more, it only serves to skew supply / demand further in favor of the downside. As I stated on January 28th in Deja View and again in Beware the Siren’s Analysis on March 20th, this rally is about relief. It is behavioral, not structural or fundamental, but our brains don’t cope well with dissonance. We find it difficult to chalk things up to randomness, so we must create a narrative where none exist in order to set ourselves at ease.
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