What Does Going Concern Have to Do with Finance?

At Black Pool Games, we try to bring together ideas from the rest of the world into our games. Our first game, Going Concern, is rooted in finance, but what does Going Concern have to do with finance? Read on to learn a little more about the underlying structure in the game and its basis in financial theory.

Risk and Asset Pricing:

For any financial asset, you are paid according to the amount of risk you take. This appears in Going Concern in two ways: 1) through non-constant payouts for Manufacturing Concerns and 2) through the Cycle Cards in the risk phase. The first is accounted for based on the cost of the Concerns relative to their expected (average) payout.

Take for example the Auto Concern and the Multifamily. Both Concerns cost $9. However, they have different expected payouts. Real Estate Concerns have constant payouts, so the Multifamily’s expected payout is $3. Manufacturing Concerns, on the other hand, have payouts determined by the Manufacturing Die Roll. On average, however, you will earn $4. They have the same cost, but because of the risk you take on with the payout volatility for the Auto Concern, you earn a higher return. You get paid to take on risk. In financial markets this is most evident through average returns of Bonds (fixed payouts) vs Stocks (variable payouts).

Risk Management:

The second type of risk, Cycle Cards, is addressed with the Politician. Outside of being cheeky, the Politician allows you to limit your downside risk during a cycle. As mentioned in the last section, you are paid to take on risk. The converse is also true; you can pay to reduce your risk. The cost to reduce the risk is the price of the Politician. It neither offers a payout, nor has any value at the end of the game, so when buying one, you are paying to reduce your risk. That Concern is then protected, and during a Cycle, only the high outcomes scenario is relevant for that Concern. In financial markets, think of this as buying an option. At their core, options are a part of risk management strategies, regardless of what you hear on Wall Street Bets. Buying an option eliminates your downside risk while maintaining your upside, for a price of course.

Diversification Across Asset Classes:

Another way to manage risk in Going Concern is to diversify your holdings across uncorrelated asset classes. Don’t worry, we will get into correlated asset classes shortly. In the game, Manufacturing and Real Estate are uncorrelated. During a Manufacturing Cycle, your Real Estate holdings are unaffected and vice versa. Additionally, Real Estate Concerns are unaffected by the Manufacturing Die Roll. The one minor exception is Farmland, which earns more based on how many Bakeries you own, so we will consider that one slightly correlated. Enough about correlation, why does this matter. In the game, one of the most frustrating things is losing everything during an unlucky Cycle Card. One way to deal with this is to diversify across asset classes. For example, if you had 3 Manufacturing Concerns and 2 Real Estate Concerns, if an unlucky Real Estate Cycle came up, you would still have your Manufacturing Concerns, allowing you to still earn payouts in the next round to rebuild your holdings.

Correlated Assets:

The last idea from financial theory included in Going Concern is the idea that correlated assets do not provide additional diversification benefits; you don’t lower your risk by adding more correlated assets into your portfolio. Having one of each Manufacturing Concern doesn’t make you diversified. It makes you just as susceptible to a Manufacturing Cycle as if you owned 4 Textiles Concerns. Additionally, Commodities are correlated assets too. Mines are correlated to Manufacturing and Logging Mills to Real Estate. Owning a Mine does not make you less susceptible to Manufacturing Cycles. If you lose all your Manufacturing Concerns, your Mine will have no payout. To be fair, the Mine would still hold value at the end of the game, but for Commodities Concerns, most of their value comes from payouts during the rounds.