04 Jan 2009

"Change the Game"

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So said a billboard when I used to run laps on the rooftop of an NYU building in grad school. At the time I was struggling with a 3rd year paper topic. I was trying to do something “bold” like Nash (at least as depicted in the Ron Howard fib fest) but I ended up merely showing that you could get arbitrarily large voter turnout even with rational agents who only care about the outcome. (Granted, you need to give me a bunch of assumptions on the preferences of the voters. But it’s not as bad as it first sounds, and in fact one of my professors started out telling me it couldn’t be done, and then 15 minutes later said, “OK I buy that” and then said the result wasn’t interesting. Grr.)

Anyhow let’s stop with my bitter grad school reminiscences and get to longtime reader Zach Kurtz’s email:

I devised a new way to play monopoly (originally for fun) and it has since evolved into a way to test the affects of central bank actions on a market (on players who don’t know they’re being observed). Using electronic banking edition of Monopoly, I would play as the banker. Unlike most monopoly games however, players have the ability to take out loans and make deposits (interest rates being set by the banker). Landing on a property or utility opens up an auction for players to bid (so prices are determined by the market). The winner of the property then has the option (starting the next turn) to put the property up for public offering to sell shares in the ‘holding company’ of that property.

I want to test how the manipulation of interest rates by the central bank affects market behavior and risk making decisions, as predicted by Austrian economists.

While obviously this isn’t a perfect model of real-life economics, how good do you think it is and how could I improve it (without making the game too complex)? What are some other variables that could be important to test?

I told Zach one problem is that he doesn’t have long-term projects, so it wasn’t clear how to model a cluster of errors a la Austrian business cycle theory.

In general, I don’t understand why more Austrians aren’t doing simulations. I think you could fairly easily show the effects of Fed distortions, and also show why idle resources should be left alone and gradually reincorporated back into the economy.

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