In last week’s lesson, we taught our kids how to think about the total cost of debt with an example they could relate to. It’s important when teaching financial life lessons to tie things together into the bigger picture — when they are ready — and we’ll be doing that with an introduction to relational budgeting in a fun way. Behind the scenes, this lesson uses the principles of game theory to illustrate our points.
So far, we’ve gone through 4 out of 5 financial lessons on debt:
- The emotional effects of debt
- Wanting vs. owing and good financial judgment/decision making skills
- How debt is like swimming
- The total cost of debt
In this 5th lesson on debt, we’ll be bringing it all together with a sweepstakes-themed game to teach the concept of relational budgeting. (For an alternate scenario of relational budgeting, here’s an earlier blog post on this topic.)
The sweepstakes scenario for teaching relational budgeting
“Congrats! You’ve made it through 4 of the 5 modules. And we’re really excited, because this last module will go a long way in setting you up for financial success.”
“We will take it slow in the beginning and build for you the founding concept of Relational Budgeting. Let’s start with a fun scenario: a sweepstakes.”
Step 1: Have two kids stay in separate rooms where they cannot see or hear each other.
Step 2: Go to the first, 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, too.
- If you choose TAKE and your partner chooses GIVE, you get $1 million and your partner gets nothing.
- If you choose GIVE and your partner chooses TAKE, you get nothing, and your partner gets the $1 million instead.
- If you choose TAKE and your partner chooses TAKE, you each get $500,000 (half)
- If you choose GIVE and your partner chooses GIVE, you each get $2 million!
Step 3: Present the child with a choice: TAKE or GIVE.
Fun factor: Get a poster board and markers to illustrate the 4 scenarios listed above.
Tips for Parents:
Let the child talk through it but remember that they cannot communicate with their partner under any circumstances. This concept refers to game theory.
The best possible outcome, of course, is #4. It’s the scenario that has the biggest payoff for both participants, which is known as the globally optimal solution. However — since they cannot communicate — it’s very likely they will end up in scenario #3.
This is known as the Nash Equilibrium. It is the stable-state solution where one participant cannot be negatively impacted by the other’s unilateral move. Put another way: if they cannot communicate, they will not end up with the best solution.
We’ll look at the same concept in a different light next week. See ya then!