Personal Finance: Winning the Money Game

Money Game

Understanding the Money Game

Money GameTo win the money game, you need to understand the game. Accumulating money literally is a game according to game theory. I’ll be posting more about game theory in a different article in a different category since it is quite a subject on its own. We will, however, use some concepts from game theory to understand the money game.

The money game is basically the creation and distribution of wealth. Some situations would leave you and another person better off after a transaction. We call this a positive sum game. When only one of you is better off and the other is worse off, that is a zero sum game. In a zero sum game, you are competing with others for the same resource.

MoneyMoney

We also have to look into the central object of the money game; that is money. Money may be what you think of first when you’re asked to think of wealth. While that is very reasonable, we should be clear that is just an agreed upon representation of wealth. Money has no intrinsic value. It is only worth anything because people acknowledge it to possess such value. By doing so, it can be used as a means for trade.

Money doesn’t need to be a physical object. In fact much of the money we believe to exist only exist as bank records. The only physical money there is in the world is called M0. This concept is not the easiest to grasp so let me use an overly simplified explanation from a book I’ll be publishing in the future, Complex Intelligence Acquisition.

Excerpt

“Let’s say that all the physical money in the world is just $150; let’s assume that $50 is in circulation. The richest man in the world JP has $100 which he deposits in a bank. Edison has ideas which needs funding so he goes to the bank and borrows the maximum amount the bank can loan him; it’s not the whole $100 but just $70 which he’ll have to pay $80 for by the end of the year as interest. In theory, $50 is still in circulation, JP still has $100 which he owns, the bank kept $30 as the fractional reserve and now, Edison has $70. So currently, the total money should be $50 + $100 + $70 = $220; the $30 fractional reserve will not be counted as it is payable to JP. By the end of the year,  $50 should is still be in circulation and the bank should have the $30 fractional reserve and the payment of $80 from Edison which adds up to $160; the bank now has a total of $110 less the $100 which JP owns. It looks like after everything, the bank which started with nothing now has a net of $10. If it looks weird to you, you’re in good company but that is a very simplified example of how banking and financial institutions work…

M0 = the most liquid measure of the money supply including coins and notes in circulation and other assets that are easily convertible into cash

M1 (Narrow Money) = Currency in circulation and demand deposits or fractional reserve

M2  (Broad Money) = M1 + savings accounts and time deposits

M3 (Domestic Liquidity) = M2 plus assets and liabilities of financial institutions”

If you’re already investing in the financial market, these concepts would really help.

Making sense of it

In a zero sum game, you have to compete with others but in a positive sum game, you benefit more if you collaborate with others. With this in mind, you can think of starting a business with partners. Since they will also benefit from the success of your business, it will be in their best interest to put as much effort to make it flourish.

Knowing that money is merely a tool for trade of things with value, we can make better financial decisions. Understanding the concept of the aggregation of money can be helpful in thinking how to make our money grow.

Action Plan

  1. Think of situations wherein you could avoid unnecessary competition by turning them into your allies.
  2. Think of something of value you can offer to people that they will be willing to pay for.
  3. Implement what you’ve thought of for action plans 1 and 2.
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