Economic lessons from strategy games

The goal of most civilization themed strategy games is to establish a civilization or kingdom, with a victory condition that involves superiority through a combination of economic, technological or military factors.

For the purposes of this post, I will use the second edition in the popular Age of Empires series, for no other reason that the core game-play mechanics are a fairly good representation of the genre and work as a simplified model.

For those of you who are not familiar with the concept, in this game the player takes control of building up an empire, competing against other players for supremacy. One of the game-play mechanics involves moving through various ages (Dark Age, Feudal Age, Castle Age and Imperial Age) mirroring the passage of history. Economically, you start out with a few resource gathering units (villagers) and a rudimentary base of operations, from which you must collect resources (food, wood, stone, gold) to finance your empire’s growth.

The game essentially engages in two opportunity costs of two kinds, and the player is forced to constantly make decisions in realtime

(1) The opportunity cost of resource allocation

Do I build more military? Do I concentrate or diversify my army composition? Expand quickly or focus on developing one city? Which technologies do I research?

(2) The opportunity cost of time utilization

Researching technology or building a unit takes a certain amount of time to complete, which means that something else cannot be researched or built during that period.

Yuval Harari in Homo Deus, said of strategy games of this nature is that the “winning strategy is usually to invest the barest minimum in non productive essentials while maximizing your productive assets”.  In essence, he is describing a playstyle which fits with my own nature as an investor: the economic boom strategy

Economic Boom

An economic boom strategy involves producing as many “villagers” or resource gathering units as possible, as well as spending on economic technologies during the initial phase of the game, while minimizing spends on military and other non-economic expenditure.

 

By deferring military  consumption and focusing on economic growth, the player that gains an economic edge as the game. This allows the player to

(1) Have more resources to afford economic technologies that improve productivity, causing his economy to boom further.

(2) Have more resource gathering units, therefore having higher cash-flow

(3) Finance a bigger, technologically superior army, with the wherewithal to both control key areas of economic interest and starve my opponent through siege warfare, or simply fight even trades till he eventually loses a prolonged war of attrition. Napoleon understood this idea, noting that an “An army marches on its stomach”

Inversion: The Rush

When we invert the strategy, we have the case of the impatient player, whose thought process is along the lines of “why wait till the enemy becomes an economic superpower, I’m going to wipe him out NOW”.

To this end, he invests a bare minimum in economic resource gathering units and spends heavily on military units, striving to mount an early attack.

The rush is by design an “all-in” strategy: If the attacker fails to do significant damage during his rush, his lack of economic investment will cause him to fall further and further behind, and the principle of cumulative advantage ensures that in most cases he will end up losing.

Real world parallels

Lets now extend the analogy to personal finance. We know that compounding works, and that its effects result in exponential, non linear growth over time. The implication, when viewed through the lens of opportunity costs, is that the younger you are, the more the opportunity cost of present consumption, because money has the potential to compound for longer. A person who spends to purchase money on an item is incurring the following

  • He has traded time in terms of his labour hours spent to acquire the money to purchase the item
  • He gives up all future return that money could have made had it been invested into productive assets.
  • Due to the fact that less money has been put to work to compound, he must work more man hours to generate the shortfall or defer retirement
  • The man hours worked represent a time opportunity cost. Every hour spent at work is an hour less that spent  with family, friends, hobbies etc

When seen through the lens of opportunity cost, an expensive gadget purchase or a fancy foreign trip has much larger costs than just the sticker tag.

Now, while the optimum strategy would be to reinvest 100% of your income and defer all consumption, this is practically not feasible (I’ve tried). The strategy gamer needs to build some military units to defend himself from attack, and a person must eat, pay rent / EMI etc. The key? Optimization and maximization of utility.  Economic boom strategies involve fixed “build orders” which involve certain fixed unit compositions and spending decisions which offer just enough defensive protection. Similarly, a person seeking to maximize net-worth without giving up too much can do a few things

(a) Buy things that offer the best price to value ratio. Many products have diminishing returns in terms of additional performance / utility gained versus cost incurred after a point. I’ve used an illustration below where computer graphics cards are bench-marked objectively in terms of their key metric: frames / second rate

(b) Buy good quality items at a discount: I usually shop like I invest, wait till there’s a huge discount in the market. If you are patient, you can pick up stuff for 50,60 even 70% off (The last book I got off Amazon was 90% off). An added benefit from buying quality is that they tend to have a longer shelf life, hence working out to a lower cost per year of usage and lower life cycle costs

(c) Find inexpensive / cheaper alternatives  The hedonistic treadmill is hard to get off, and is better avoided. Fortunately, there’s usually a low cost alternative to everything. For example, if you want to save on travel costs, try traveling to a country with a weaker currency, eating the local food and staying in a hostel. Your wallet will thank you.

There is an old saying that a penny saved is a penny earned. I propose the (Indian) investor’s corollary: A paisa saved and invested well, is a rupee earned.

 

 

 

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