proposal for a modular financial game

Financial Education Association

PROPOSAL FOR A MODULAR FINANCIAL GAMEAuthor(s): John Tepper Marlin and Russ FoglerSource: Financial Education, Vol. 1, No. 1 (Fall, 1972), pp. 79-84Published by: Financial Education AssociationStable URL: http://www.jstor.org/stable/41948903 .

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79

BARUCH COLLEGE 17 Lexington Avenue New York, N.Y. 10010

John Tepper Marlin Assistant Professor

PROPOSAL FOR A MODULAR FINANCIAL GAME

Use of games in business schools has increased rapidly in the past few years, and in some schools overshadows the case method as an integrative teaching device. However, at schools like Carnegie-Mellon, Harvard, NYUy games are taken as a separate course. This paper is addressed to the problems of individual professors who would like to use games in their courses, specifically in the finance courses, but who do not have massive university computer support.

Finance has traditionally been divided into three categories: corporate finance, investments, and financial institutions. My proposal is that a game be developed and marketed which would permit three classes to play simultaneously; allowing interaction through specified variables which could be fixed in advance by the instructor in the event that other classes are not available to play.

Several games in the finance area already exist. The one most suitable for use as a module for an interactive game is FINANSIM. 1 will describe it briefly, then discuss its shortcomings and possible remedies.

FINANSIM OUTLINE

Each student or "team" of students is assigned a firm number, and an identical firm history. The purpose of each firm is to maximize shareholders' wealth, which is a combination of dividends paid out and the increase in the price of the firm's stock.

Students have eight types of decisions to make: (1) How much machine and plant capacity to buy. (2) How much to produce. (3) How much in marketable securities to buy or sell. (4) How much to borrow from the bank in term loans, and for how long (3,4, or 5 years). (5) How much in debentures to issue or retire. (6) How much common stock to issue. (7) What dividend to pay. (8) Number (0 to 3) of each of three possible capital improvements to purchase.

1. Paul Greenlaw and William Frey, FINANSIM (International Textbook Co., 1967).



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Each period students are given the price of their product for the next period, and a forecast of demand for the next. five periods. The forecast is generated by a random number related by a formula to the actual demand (set in advance by the instructor), so that 2/3 of the time the forecast will be within one standard deviation (also set by the instructor) of the actual demand.

Demand may be met from the firm's inventory and production. If inventory and production are together less than demand, the excess demand is lost to the firm for that period. Production must be equal to or less than- machine capacity, and machine capacity must be equal to or less than plant capacity. Plant capacity can be created only after a lag of one period, whereas machine capaaity can be ordered for the period for which the student is making a decision. Both machine and plant capacity deteriorate from period to period, the former at a rate of 20$ of the original purchase, the latter at a rate of 5$.

Certain rules are established to help students prepare their income statements^ cash flow projections and balance sheets each period: 90$ of sales are -cash, 10 $ are accounts receivable which are paid off the following period. Costs for certain ranges of production are provided each period. Of the cost of production, 90$ must be paid immediately, the other 10$ becomes accounts payable which are covered the following period. Each unit of plant capacity costs $8, each unit of machine capacity costs $2"; both are payable immediately even though plant capacity may not be used for one period. Fixed manufacturing expenses are charged at a rate of 25^ per unit of plant capacity, and 20^ per unit of machine capacity, for each period of the life (20 years for plant, 5 for machinery) - of the capacity. Selling' and administrative expenses are charged at a rate of $50,000 piu's

' 10$ of the

value of the firm's sales for the period. ; '

SOME REFINEMENTS ON FINANSIM

The FINANSIM game as it .stands is difficult for an instructor-even for one with some programming knowledge-- . to operate by himself without a very intensive investment of his own time. A full-time graduate assistant is usually given charge of the game, but it seems to take several semesters before an instructor can reduce his own degree of involvement.

One elementary improvement is to bypass the card («punching procedure that the game is built around, and have the control cards and firm history cards written onto tape, in addition of course to the program cards which should be in the computer library. The decision cards can then be included simply with a job card and control card, reducing by 90$ the likelihood of the game aborting because one out of 500 or 2000 cards is out of place.



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Many students have complained to me that the game is very hard for the first two periods, and then becomes easy. One solution is to introduce variables a few at a time. I have my students decide only on production, capacity (plant and machinery) and marketable securities in the first decision that they hand in. Their second decision is extended to include issuance of debentures and common stock, and their third decision to all variables. This makes the first decision easier and the next two more interesting.

It is useful to the instructor to be able to discuss students' ranking from period to period, based on PSGIOW (Per Share Growth in Owners' Wealth, dividend payouts plus increase in stock price). This can be done by hand, but it is relatively easy to add a few FORTRAN lines to the FINANSIM deck to have tfye instructor provided with a class summary. It would bé even more useful, but much more time-consuming, to have basic ,mis takes that students make (such as inadequate capacity) inûicàtèd on the class summary. This would help the instructor anticipate questions from the class and go over the game. As it stands, it takes 10 minutes to go over the game output of one firm, and it is therefore very difficult to give individual, attention to students each period.

Sometimes students become very discouraged with their progress. They may become insolvent (i.e., both their cash/assets ratio is less than .05 and their current ratio is less than .5)> for estample. Rather than having them play with a bankrupt firm, they may prefer to form a new firm and start over again. This is easy to do: simply give the student a blank history deck.

Another relatively minor change in FINANSIM is to allow student to "u¥tock as well asse^ it. This can be done by issuing a negative amount of stock, although once in a while students have reported strange results.

MAJOR MODIFICATIONS OF FINANSIM

As FINANSIM stands, the most important -ariable is the productio. decision. If this becomes too easily predicted, there is very little left to the game beyond accounting and rules of thumb (which, however, are important enough for students to learn to justify use of the game for this purpose alone). One way to maintain suspense is to make sure that the standard deviation is large. A more interesting way, to be introduced in the fourth or fifth period when students have become familiar with the game, is to make price variable depending upon the production of the class as a whole. If the class overproduces, the price falls; if the class underproduced, the price rises. The price per unit of sales then becomes, of course.* a forecast. I have already prepared the necessary FORTRAN lines for this modification, and have used them, but this modification carries with it the disadvantage that the entire class must be run at the same time. Late decisions and keypunch errors that necessitate rerunning part of the period become extraordinarily difficult, particularly when punched cards are being used rather than tapes.



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Time-sharing terminals could be used more extensively in the game, which presently depends on the batch-processing of cards on one of three possible IBM models. Gerald St. Amand of Michigan State University prepared a version of FINANSIM using GE's time- sharing facilities, but the lengthy printing time using this method with normal terminals makes it a less attractive alternative to the IBM. Use of a high-speed termianal in conjunction with St. Amand 's version would be a different matter. Furthermore, it might be possible to use both a high speed printer for end-of-period printouts and slower printing time-sharing system for student feedback regarding his proposed decision, information on decisions to the instructor, variables from other classes, as dácribed below, and so forth, in a carefully prepared development of the game.

A major deficiency of the FINANSIM instructor's aanual is that the model on which the game is based is not spelled out. Very general statements are made by the authors regarding the importance of different variables, but nowhere is the formula by which the all-important stock price is determined explained. It is no doubt possible to go from the FORTRAN statements back to the model, but I gave up an attempt to do this, and would be glad to hear if someone else has completed the job.

Without spelling out the model completely, one can still question it. One objection that has been raised by users at the Columbia Business School is that the stock price ignores the change in return on equity, and looks only at the return for the past period. The FINANSIM version that has been played at Columbia has been modified to take into account ROE over the previous three periods, not just the most recent one.

INTERACTION: STOCK MARKET PSYCHOLOGY

Assuming that an improved, more flexible yet easier to use FINANSIM game can be developed, how would it interact with other modules? My proposal is that certain variables be determined by other classes, so that students will have to try to find out what is happening in the other classes to predict these variables.

For example, the stock price could be set by supply and demand in an investments course, and this price could be fed back into the FINANSIM game and used as the price which a firm will get for its stock. At Baruch College the FINANSIM output has bsea used in 1970 and 1971 in two investments courses, with students bidding for the stock of firms which were being managed in a corporate finance course. Students in the investments course were (as in real life) negligent about looking over the financial statements of the FINANSIM companies until ( as in real life) some companies went bankrupt and were liquidated, without benefit of Government aid J The bookkeeping problems of the stock market game have been handled by a FORTRAN program, and a start has been made on eliminating the need for specialists and replacing them with a computer formula. If the details of the stock market game can be worked out satisfactorily, the New York-Stock Exchange would doubtless be interested.



O •"> o O 3 •">

While the stock market or investments module would determine the price of a company's stock, and prevailing industry price/earnings ratios,, the -financial institutions mödule would determine the price and availability of Credit. Depending lipon the willingness of a comniercial bank management class , or ari., insurance class, to risk their '£unds, the cost of borrowing could' vary quite widely from period to period and according to the length of maturity of the loan requested. If a firm's current ratio dropped below 1 he might find that he couldn't obtain any funds at all, or only at a high surcharge. What protects the firm is that fact that the financial institutions are being run by students who don't want to forego' a potentially high return, so that credit will almost always be Available at some price (unless the instructor, playing the role of the Federal Reserve or State usury laws, restricts interest rates).

Going beyond the purely financial type of variable, it would be fairly easy to prepare modules (or adapt them from existing games) to set demand based upon the economy of a macroeconomics class 5 to relate it to the efforts of a marketing class; to introduce labor problems from a labor class. Existing large-scale business games have included variables such as these, so that the

path has been marked out to a certain extent.

Two areas of interest have seen relatively little work. The first is a scientific study of how to play computer games, and a

comparison of this kind of study with real life situations. Baruch' s

prizewinning M.B.A. thesis was written (by Aaron Messing) on the development of a quantitative solution to FINANSIM. If his solution is not applicable in some respects to real businesses it means that to this extent the FINANSIM program could be modified. The second area of interest is the use of the business game as a research subject in the behavioral sciences: why are students being . irrational, what makes them do the dull accounting work that is essential to playing the game (and why are some students so reluctant to do it), and why is the game so popular (what do students really learn)? The stock market game turned out to have tremendous behavioral implications, at least for the instructors who were involved .

CONCLUSIONS

This is a proposal, not a complete package of programs. If there is sufficient interest in the proposal it should be possible to persuade an expert in APL or PL/1 programming to cooperate in

developing the software, in conjunction with a publisher and/or a software company. However, before such work could start it would be important for users to decide what they want, and what is available. The next stage rs to try to meet the most important neer3« of usox-c m the simplest possible way.



84

COMMENT

Cv the general question of the role of games in the finance curriculum, previous research indicates that the major value for the student is increased participa- tion and involvement. The rate of increased learning appears to drop off rapidly as the complexity of the game increases. (An excellent overview of games is provided in Chapter 5 of Meier, Newell and Pazer, Simulation in Business and Economics, published by Prentice-Hall.)

FINANSIM is probably about middle in the complexity spectrum. Students are probably therefore best introduced to it gradually, as suggested by Marlin. A special problem with the game as it is set up by the authors (i.e., using the parameter deck supplied with the program deck) is that the production decisions "wag the dog,: of the financing decisions for the first four or live periods. High fixed costs and low variable production and inventory costs encourage overproduction.

The idea of combining investments and corporate finance decisions in a game played by both classes deserves more attention. It is potentially very power ful . (Russ Fogler)



proposal for a modular financial game

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