With relational budgeting, our goal is to have our child or children develop the skill of working with another person relationally in order to make efficient and effective decisions with money.  The main concept is to help them understand the need to communicate and how that communication can lead to decisions that are optimal for all involved.

Why is this important? Simply put, before we partner up with someone as adults, almost all of our training and experience with money involves one person: ourselves. All decisions are easily greenlit and rationalized when there’s no one to offer resistance. The implied assumption is that it is all for our personal consumption. By the way, that is a pretty good definition of greed.

But what if we could address the issue in the child-rearing years? What if we found a way to have our kids consider and communicate with others when it comes to money?

This need for communication is actually pretty simple to illustrate…

THE SWEEPSTAKES GAME

Put two kids in separate rooms where they can’t see or hear each other.

Go to the first kid and tell them the following:

You are in a “Free Money” giveaway sweepstakes with a partner you cannot see or hear. You have the following options…choose TAKE or GIVE. Your unknown/unseen/unheard partner has the same options.

1) If you choose TAKE and your partner chooses GIVE, you get $1 million (partner gets $0).

2) If you choose GIVE and your partner chooses TAKE, you get $0 (partner gets $1 million).

3) If you choose TAKE and your partner chooses TAKE, you each get $500,000.

4) If you choose GIVE and your partner chooses GIVE, you each get $2 million.

So…what do you choose? TAKE or GIVE?

To make things a little easier, get a poster board and markers to illustrate the 4 scenarios listed above.

It should be immediately obvious that the best outcome for both participants is that they both GIVE. This is called the globally optimal solution. However, you have to remember that they can’t communicate and therefore do not know what the other will do. Each participant will naturally apply game theory. “If the other TAKES and I GIVE, I get nothing!” It is evident that both will independently come to the same conclusion to TAKE. This is called the Nash Equilibrium – the stable-state solution where a participant cannot be negatively impacted by the other’s unilateral move.

Layman’s terms? If you don’t communicate, you can’t make the best decision for all.

 

Make sure you check out next month’s post as we continue to look at Relational Budgeting.