An Economist Plays Monopoly

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A few days ago, I appeared on NPR Morning Edition talking about Monopoly (the game, not the market form).

Until then I hadn’t thought much about the economics of the game (which I played very often as a child, with our sons and for the past five years with our grandchildren).

Monopoly teaches us some useful economic lessons:

  1. The very first event illustrates the diversity of people’s utility functions – I like the “Top Hat” piece, but others may prefer the racing car or the Scotty dog.
  2. With only $1500 to start, you can’t buy everything you land on. This requires constrained utility maximization. (I never buy railroads or utilities early in the game, since I believe the payoff per dollar is less than buying a regular property.)
  3. You need to optimize dynamically, since you should retain money to build houses and keep enough money to avoid bankruptcy if you land on others’ properties before they land on yours.

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  1. TobyG says:

    Surely the most important lesson from Monopoly is that, due to a mixture of skill and luck, one or two players end up with all the assets, leaving the rest to limp around the board hoping to avoid trouble.

    Remind you of the current economy?

    And the ONLY solution is to restart the game. But since that’s “socialism,” we can’t have that, can we?

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  2. Raymond says:

    Actually, the key is to purchase as much property as possible (including railroads and utilities) to diversify your portfolio of income stream. Imagine the position of the other players’ pieces as indicators of how well a particular geography of the board is doing. If all the other players are on the south side of the board, you better hope you have some property there, even if it’s a low-paying railroad.

    If money is tight when having to pay others, you can always rent your own property to the bank (mortgage?) to get a temporary loan.

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  3. Jacob says:

    I’ve always found the best strategy in monopoly is to buy everything you land on (and everything you can afford at auction).

    Even if it means having to mortgage some properties you’ve already purchased. Every property you buy gives you one more safe spot on the board, and might prevent another player from getting a monopoly.

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  4. Jonathan Weinstein says:

    Actually, you should buy everything you land on early on. You have more liquidity than you think, since you can mortgage properties at will…the penalty when you unmortgage is pretty small. Buying a property you are likely to mortgage is like buying a very cheap option. Even in the *worst* case that you are quickly forced to mortgage it and collect no rents, you are better off than if you paid rent to an opponent just a few times. Buy everything.

    The railroads definitely more than pay for themselves. Not buying railroads is a *big* mistake. Of course other monopolies have more long-run potential; but if each player has one colored monopoly and one has railroads also, the railroads will win almost every time.

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  5. Calvin Graham says:

    Of course, if you play with more people, the game becomes as much about “buy everything you land on while it’s there” and then the game becomes about negotiating and dealing skills as much as utility maximization for your dollar.

    Basic as it is, Monopoly can be made complicated very quickly if you agree to join ownership agreements between players and insurance options. The comparison to the real world of credit derivatives and financial products thus makes it as relevant to today’s exotic financial world as it was to the one when it was first released

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  6. Matt says:

    The most important lesson from Monopoly is that of information asymmetry. Someone who knows the probability of landing on each group is very likely to trade Mayfair (Boardwalk) away for a seemingly much less lucrative orange or yellow monopoly.

    Of course while the rent is lower, it’s far more likely a competing player will land on either the orange or yellow groups, and it’s cheaper to build houses, meaning the player will have hotels up much quicker than the player who thought they got a “good deal” getting the high-value indigo Monopoly will be able to.

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  7. Drill-Baby-Drill Drill Team says:

    Monopoly is really a Real Estate Game in a Frothy Property Hungry Market with Easy, No Doc, No Interest, No Down Payment, Variable Interest Rate, Sub Prime Loans.

    In Reality, Property Owners pay 5% Property tax rates which rise 1% oer year, have HUGE interest payments, have to pay maintainance as lawn care and re-roofing, and suffer a declining 30-40% in property values and then have to spend 10% of the time on the phone trying to get through to their lender.

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  8. Bobby G says:

    A couple of other Monopoly principles:

    -Investment allure: maybe it’s commonly accepted as general game strategy but the purchase of any property landed upon early in the game is prudent not because of the small chance of getting some early landed-on fees from other players, but for the future value, for example, as part of a “team production” monopoly, where the value of the group (far) exceeds that of the individual properties. Leading into another principle…

    -Investment diversification: having a hand in many pots doesn’t directly hedge bets like in an investment market, but I think an extrapolation could be made that with more properties there is a higher chance of being the final piece in someone else’s puzzle, thus garnering a premium for a property. Perhaps not all properties will be extremely valuable, particularly when the color is owned by 3 or 4 players, but get enough different properties and there’s a higher chance you get such a good deal on one that it pays for all of the other chances taken.

    I’m pre-coffee this morning so there’s probably more, but I’ll let these ride for now :)

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