Wednesday, January 09, 2002

Economic Simulations I found this neat game last year when I was down with double-barrel pneumonia - I wasted a goodly number of hours on the shareware version, and I decided to upgrade last fall, to see the full extent of the simulation. It's the best computerized stock market game I've ever seen. There are random events, stock prices very by corporate returns, and the whole thing, considered as a market simulation, is reasonably coherent. It doesn't subscribe to the rational markets theory, so there are no inexplicable random walks. It's even rather zero-sum airtight as these things go, so there aren't any singularities that allow one to smoothly and painlessly get lots of cash fast. However, like every other game out there, there are ways to break it. And I found how. And how this game is breakable is an interesting commentary on business ethics, economic models, and American culture. The game separates companies into three categories: 1)joint-stock enterprises that invest in productive capital in 33 different industry categories. Over-investment drives down returns per dollar invested, while underinvestment means high returns, so companies enter industries. They can own stock in anything, borrow money, issue bonds, stock, and they can go bankrupt. 2)insurance companies - allowed to own stock and they write insurance policies - something that the game has not implemented -- so they are a non-important feature of the game. 3)banks - they lend money to the enterprises in the game, and they can borrow money from the Federal Reserve (this is where the game is broken, among other places). One strategy for making lots of money is to go into a stagnant industrial sector, consolidate the industries in that sector into two roughly equivalent companies, one of which controls the bank that holds the other's loans. Then, one buys the other, loads it down with unpayable debt, sells out before the market notices, buys the competitor, and proceeds to call in the loans. The other company liquidates, and the RoI of the first company shoots through the roof, raising its stock price. Conspiracy in restraint of trade? Nonsense! Ethical American business practise! Laudable cleverness. The other strategy involves leverage. Once you have enough money in the game, you can play silly marbles with bank loans. It goes like this: you have a safe cushion of cash. You buy a cheap company, transferring part of your safe cushion into it - enough so that when you borrow all the money possible against it, you're borrowing enough money to endanger the lending bank should the company default - something like a 1.5 - 3 multiple of the bank's net worth. Then this company buys a second company (cheaply), transferring all of its cash into that company, which borrows all the money it can, and so on and so forth. Make sure that your bank isn't one that gets borrowed from. You'll end up with trillions of dollars in a couple of end -of-string patsy companies, loaded up with enormous debt and completely invested in depressed sectors. Let's spend three trillion dollars on the railroads! 'Rut-'ro 'raggy! The Railroad sector is in an unparalleled depression! No problem, you're supposed to lose that money anyway. You will begin to lose the first companies to defaults - crashing the banks that hold those companies' loans, which borrowed the money for those loans from the government. The government diddles around for a while, and then nationalizes and re-capitalizes the banks, wiping out bank liability. You buy the banks when they are resold into the private sector, at very low prices. The banks shoot back up to their market value. Instant 6000 percent profit. We have just profited at the expense of the American taxpayer. Did I mention that this game is used in b-schools to train the Executives of Tomorrow?

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