As the weather soured this past weekend, our plans for a long outdoor hike morphed into a long indoor marathon of Monopoly™. There were 5 of us, and figured that given the unexpected rainfall, we might as well dust off the Monopoly board and spend our afternoon keeping dry. To make the game a bit more interesting and reflect the current economic climate, we altered the rules – which we referred to as “recession-rules” Monopoly (as opposed to “normal-rules” Monopoly).

Instead of each player receiving $1500 at the start of the game, we would each receive $1000 (to reflect the $50 Trillion of wealth that has been lost in the last 18 months), and instead of collecting $200 for passing “Go”, each player would collect only $100 (to reflect the massive wage losses seen in the last 12 months). To further reflect the broader economic climate, no loans were permitted in the game (i.e., players were not allowed to mortgage their properties to receive cash from the bank, nor were players permitted to issue loans to one another). With these altered rules, our goal was to see how purchase behavior and wealth would unfold on this artificial economic landscape. The results were rather eye-opening, and sheds light on the fundamental dynamics of price in a down economy.

One startling feature of the game that remained consistent between “normal rules” and “recession rules” was that the price of any property on the board, or the price of any house/hotel was publicly displayed for all to see. This price conveyed essential market information about the value of “the goods”. Yet, despite the publicly known value of a property, property prices always deviated from the stated value once a buyer wished to purchase the property from a player that already owned it. Moreover, different buyers were prepared to pay different prices for the same exact property and in all cases the offered prices were higher than the stated value of the property (i.e., the price paid by the original buyer). This pattern was held true despite the recessionary conditions that were imposed on the game. There are a few important observations to note here:

1. Different people were prepared to pay different prices for the same good.
2. Those prices were always higher than the stated value of the good.
3. Buying & selling still occurred despite lowered wealth levels.
4. Buying & selling still occurred despite the unavailability of credit (no mortgages were allowed and no player-to-player loans were allowed).

We observe these same characteristics when… Continue reading →