Game Theory

WHEN I WAS A KID, I never liked the game Monopoly. I found it slow and uninteresting. But now, as a parent, I see its value. I’ve tried a lot of things to teach my children about money, but nothing comes close to Monopoly in its ability to convey important personal finance lessons.

Sure, it helps kids practice basics like addition and subtraction—but there’s a lot more to it. If you’ll be spending time with children over the holidays, I recommend giving Monopoly a try. Here are five fundamental lessons I think the game can teach them:

1. Yield. Every property on the Monopoly board is different. Some cost more than others and each pays a different rental rate. As a result, some are much better deals than others. Kentucky Avenue, for example, costs \$220 and its rent is \$18, resulting in a yield of about 8%. Meanwhile, Boardwalk is much more expensive, at \$400, but its rent is also higher, at \$50, putting its yield at 12.5%. This makes Boardwalk a much better buy, even though it’s so much more expensive. Little kids tend to focus only on the prices of properties, but this is an opportunity to teach them about rates of return.

2. Total return. Income yield is only one way in which a property can be valuable. A second key lesson: An asset may be worth more to someone else than it is to you. In fact, the often-overlooked reason the game is called Monopoly is because players can double the rents they earn when they own all the properties in a set. Result? If another player has all but one of the properties in a set, and you hold the remaining one, he or she might pay an above-market rate to buy it from you. That’s the second lesson. Most assets carry two types of return potential: income and appreciation. Whenever you’re evaluating a purchase, you want to consider both.

3. Luck. Chance cards illustrate the role of luck—both good and bad—in everyone’s financial life. Sometimes, good fortune drops out of the sky (“Advance to Go, Collect \$200”). Sometimes, bad luck comes along (“Speeding Fine, Pay \$15”). The lesson: Life isn’t always predictable and it isn’t always fair—an especially good lesson for little kids. But there are ways to protect yourself from bad luck, including holding more cash than you think you’ll ever need.

4. Liquidity. If a player ends up in financial distress, properties can be mortgaged to raise cash or they can be sold to another player. But you might end up selling at a fire-sale price. There are lessons in this about leverage, liquidity and financial stability.

5. Risk preference. Monopoly participants seem to fall into three groups, each with varying degrees of risk aversion. Some rarely buy properties, so as to conserve cash. Others are willing to open their wallets, but only for properties they think make sense. Meanwhile, those in the third group are willing to spend top dollar buying up the most valuable properties—and they’ll spend even more to populate them with houses and hotels. I’m sure a psychologist would have a lot to say about why this is the case. But for kids, the basic lesson is to see that people are different in this way and to see how other approaches work out. It’s important also for kids to see the role of luck, which can cause a good strategy to fail or an unwise strategy to succeed.

A further lesson on risk: In Monopoly, as in real life, the amount of risk you decide to take is a choice—but only to an extent. Those who take too little risk can see their savings dwindle. Those who take too much risk can, of course, fall into bankruptcy. Monopoly does a good job illustrating how risk is a choice, but only within certain boundaries.

While Monopoly mirrors real life in multiple ways, there are two respects in which it’s unrealistic. First, when you set up a Monopoly game, each player receives the same amount of cash. That makes sense for a kids’ game. But, of course, that isn’t how the real world works. Monopoly would be a different game if each player started with a different amount of cash. That’s a different kind of lesson, but probably worth pointing out to children.

Second, Monopoly is all about buying and selling investments. There’s no concept of work. For most people, though, you can’t start investing until you’ve spent some time working and saving. That probably would have been difficult to build into the game, but it is a key shortcoming. By ignoring the value of work, it leaves players with the idea that the only way to build wealth is by investing.

A final thought: When I was growing up in Massachusetts, we once took a field trip to Plymouth Plantation. The lesson I learned: Landing in New England in November wasn’t the wisest move. About half the Pilgrims didn’t make it through that first winter. If it weren’t for the help of Native Americans, who taught them key survival skills, it would have been much worse.

Therein lies the final lesson I try to convey to my children when playing Monopoly. In our financial life, most people will experience a mix of successes and challenges—for a variety of reasons, including plain old bad luck. For that reason, we shouldn’t judge ourselves—or others—too harshly.

Adam M. Grossman’s previous articles include Trends That EndGetting Personal and Sweat the Big Stuff. Adam is the founder of Mayport, a fixed-fee wealth management firm. In his series of free e-books, Adam advocates an evidence-based approach to personal finance. Follow Adam on Twitter @AdamMGrossman.