Monopoly Is A Terrible Finance Teacher - Business Insider

Monopoly is one of the most popular board games of all time.

But with its plethora of inaccuracies, it doesn't offer the best lessons in real-world finance.

The purpose of the game is "to become the wealthiest player through buying, renting and selling of property," and prudent property ownership decisions are indeed a proven path to wealth.

Players also learn that property values are largely based on location, and they receive economic lessons about scarcity, tradeoffs and making decisions with imperfect information.

Still, if you're hoping your kids will learn something about finance while they're playing, here are a few of the game's inaccuracies you may want them to be aware of.

Most Pricing Is Not Market Based
In Monopoly, prices for unimproved properties, houses and hotels are flat, and the rents players pay when landing on each other's properties are fixed.

The game's property values are pre-established by a central authority (the bank) instead of fluctuating based on supply and demand like they do in real life - at least, in capitalist societies, and Monopoly is clearly capitalist.

The rules do reflect reality somewhat, however, in that they allow players to negotiate trades for unimproved properties, railroads and utilities (but not houses or hotels), based on whatever values they agree upon.

Property Rights Are Unusual
When you buy an unimproved property, a house or a hotel in Monopoly, you buy it from the bank. In real life, only foreclosed properties are purchased from banks; properties are usually transferred between individual owners.

Monopoly players also must pay cash for land and structures instead of financing them with a mortgage. Mortgages are only used when players run into financial trouble; they may mortgage properties they own back to the bank for the mortgage price printed on the title deed card for that property. For example, a player who owned Kentucky Avenue, purchased for $220, could get $110 for the property by mortgaging it to the bank. While the property is mortgaged, the owner cannot collect rent. In real life, most people do not pay cash for properties; they use mortgages, and homeowners collect rent on mortgaged properties all the time.

Another aspect of property ownership unique to Monopoly is that players cannot improve their properties until they own all the properties of the same color, and players must build evenly across their properties. Players also have to build small structures (houses) before they're allowed to build large structures (hotels). While real-life rules do restrict what improvements owners can make to their properties through city zoning laws, neighborhood deed restrictions and homeowners association requirements, there is no need to own two or three adjacent properties before building is allowed, and there is no requirement to build multiple small properties as precursors to a larger property.

Income Is Based on Luck, Not Skill
In Monopoly, you receive a $200 salary every time you pass Go. How often you pass Go depends on the luck of the numbers you roll with the dice and any Chance and Community Chest cards you draw that may help you move around the board. Income is also based on which properties you happen to land on and whether you're able to accumulate monopoly holdings of like-colored properties that allow you to collect rent from your opponents. Players get paid - and have to pay -when they randomly draw cards with instructions, such as "Your building loan matures: Collect $150" and "You have been elected chairman of the board: Pay each player $50."

In real life, the amount of money you earn is primarily based on skill development and hard work. Only a small percentage of the population (gambling winners and inheritance recipients) receives an income based on luck. The idea that income is based on luck is a self-defeating attitude which prevents many people from reaching their financial potential.

Taxes Are a Gamble
You never know how much income or property tax you'll pay or when you'll have to pay it in Monopoly, and taxes fall on players randomly rather than being based on their actual economic activities.

Monopoly players don't pay income taxes on a regular basis - only when they randomly land on the Income Tax board space. If Monopoly were like real life, players would pay income tax each time they passed Go and collected $200; they would also pay it when they drew cards like "Receive for services $25," "From sale of stock you get $45" and "You have won second prize in a beauty contest: Collect $10."

The way taxes are calculated in Monopoly isn't realistic, either. When a player lands on the Income Tax space, he or she may pay taxes of either $200 or 10% of net worth (including cash, land and buildings), but cannot first add up assets and then choose to pay the cheaper amount. In reality, while many provisions of the income tax code do provide for two or more ways to calculate tax liability, taxpayers often have the option to choose the calculation that results in the lowest liability. Furthermore, real-life income tax is based on income, not net worth.

Monopoly players also don't pay property taxes on a regular basis. Instead, players who draw an unfortunate community chest card get assessed for street repairs and must pay the bank $40 per house and $115 per hotel. There is no tax on unimproved property, but in real life, property taxes are based on the value of both land and improvements and must be paid on a semi-annual, annual or bi-annual basis.

School taxes, which are paid from property taxes in real life, also are based on chance in Monopoly. A community chest card instructs unlucky players to "Pay school tax of $150." A more realistic game would instruct players to pay school taxes based on a percentage of the total value of all properties owned.

The Bank Can Make Permanent Errors in a Customer's Favor
Monopoly has a chance card that states, "Bank error in your favor: Collect $200." In real life, if the bank makes an error in your favor, it will only be temporary. If you spend money that was erroneously deposited into your account and don't repay it, you've committed theft. You'll have to repay the money and you could also be fined.

Wealth Is a Zero-Sum Game
The last player standing after all the others go bankrupt wins the game in Monopoly. This rule implies that wealth accumulation is a zero-sum game; only one person can achieve ultimate financial success and only if everyone else is destitute.

To be sure, there are plenty of critics of income inequality who believe this Monopoly rule contains a nugget of truth. They think that when the top 1% get richer, the other 99% consequently become poorer. This belief persists even among well-educated intellectuals and economists and is perpetuated by the media.

In reality, there is no limit to the amount of wealth that can be created in a free-market society where government regulation is limited to essential functions. The world could have billions of billionaires if that many people could figure out how to create a billion dollars' worth of value. Your income need not fall for Warren Buffett's income to rise.

The Bottom Line
In the end, Monopoly is just a game, and even if some of its lessons about finance aren't entirely accurate, at least it gives kids an awareness of things like mortgages, bankruptcy, property ownership, money management and taxes. They aren't likely to get that awareness from most video games or television programs.

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This story was originally published by?Investopedia.

Source: http://www.businessinsider.com/monopoly-is-a-terrible-finance-teacher-2012-11

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