Episode #76: Lessons from the Trading Game

Peter Drucker taught that “Business is society’s change agent. All other institutions are designed to conserve if not to prevent change.” Companies exist to create wealth, no other institution can do it.

By playing the Trading Game, participants in this session will learn the subjective nature of value, and how increasing the availability of goods and services your company offers leads to prosperity, happiness, and a higher standard of living for all.

Participants will come away with a deeper understanding of how business is a serious moral enterprise—not the simplistic idea it is based on greed—and that cooperation is far more prevalent than competition.

The game begins when the participants randomly draw a card from a deck, each one containing an item they will now own (each card will contain an electrical item you’d find at Best Buy, of approximate equal price, such as an electronic gadget, Coffee Maker, memory stick, cell phone, DVDs, etc.).

The group is then divided into, say, ten groups of five participants each. They are instructed to rate how much they like their gift, using a scale of one to ten. The total score for each group is then summed.

Then the instructor allows the participants to trade only within their group of five, allowing them to exchange for a gift they value more. The gifts are then scored again, and the total score increases.

Then the instructor allows the entire class to trade, expanding the number of potential trading partners from four to forty-nine. With many more options, the complex trades that take place would make an economist proud.

We have discovered some people don’t trade after discovering their gift is very popular, but they do increase its score (the Bandwagon and Endowment Effects). Other scores may actually decrease after an exchange, as Buyer’s Remorse sets in. Overall, though, the total score goes up again.

This may be a simple game, but it does a wonderful job illustrating complex economic principles in a way that a child can understand. There are at least seven lessons to take away from this game:

  1. Trading freely can add value even though the traded items remain physically unchanged.
  2. The more trading partners there are, the better—wealth and happiness are increased.
  3. A free exchange is a win-win game, not zero-sum.
  4. The game is win-win because of the rules set up beforehand—theft and coercion are not allowed, nor does anyone have to trade if they don’t want to.
  5.  Scarcity is almost always real. You can’t have everything, so have to make tradeoffs.
  6. Opportunity costs—that is, economics does not ask “What do you want?,” but rather “How much do you want it?” which involves making tradeoffs, not having final solutions.
  7. Economic value is in the eye of the beholder.
  8. People trade, not governments. The Trade Deficit is an accounting fiction that doesn’t describe the economic fact that individuals are made better off from trading.

If China invented a vaccine against cancer would you not buy it because it would increase our trade deficit?

By operating a company, you are expanding the choices available to the consumer. This is the real source of wealth in an economy—the variety of goods and services available. If it were otherwise, any country could achieve wealth simply by printing more pieces of paper money.

Perhaps this is better understood if we think of Nathan Mayer Rothschild, one of the founders of the international Rothschild banking dynasty, probably the richest man in the world at the time of his premature death in 1836 at the age of 58 from an infected abscess. Despite having the best medical care money could buy, he did not have access to antibiotics that today could be purchased from any pharmacy for a few dollars.

Would you rather have Bill Gate’s income in today’s world—with its abundance of goods and services—or during the time of Rothschild? Another way of articulating this is that the wealth of nations resides in consumer well-being, not profits.

That said, your company has to understand what customers truly value, since all economic value is in the eye of the beholder. How your firm monetizes the value it creates for customers is your business model.

Ed and Ron learned about the trading game from Jay Richard’s excellent book, Money, Greed, and God: Why Capitalism Is the Solution and Not the Problem.

You can download sample cards here.