on the return from investments


Sometimes it happens that someone says to you something occasionally – like as a side remark, but that that phrase – despite its parenthetical nature – sticks in your head. Something similar to this happened to me when an intern at a german company where I was also as a student intern said to me: Nadja – one should buy shares only with gratuitous money, never with money that one needs. Maybe this phrase stuck in my head because this person was one of the very few persons in my surroundings which knew something about the stock market, who knows. However bank accountants and other financial consultants kept telling me to care for my retirement by investing in all sorts of bonds. In view of this discrepancy of recommendations and out of curiosity I thus took part in an online game which was organized by a german public TV station (If I remember correctly WISO, ZDF).

In this game one started with a fixed virtual start amount of money which could be virtually invested in real stocks at real prices. Despite that this “stock market” was only a game it nevertheless became quite captivating. I learned a lot in this game, like that it is rather difficult to have high returns on short term investments a.s.o At the end the game became quite time consuming though. But as a result I decided to follow the advice of the person from the internship which was sound. I never owned a bond.

But this little adventure in financial markets taught me more. It made me clear that the feature of “surplus” or “gratuitous money” is quite essential. Or in other words the often proclaimed view that financial markets are democratic and open to everybody seems to be more informed by concrete interests (like to sell financial packages to laypersons) than by actual facts.

Further deduction allows to say in a simplified manner that there are the following ways to become rich (we leave marriage and adoption out): that is either by being able to “sell” highly demanded goods (like done by hollywood actors, exceptional artists, rags to riches etc.) or via owning a surplus and letting the “money work” with high returns and/or a combination of the two. Lotto wins etc. are the exception to this rule. Lets consider criminal activities also as an exception.

It is interesting to observe that the first kind, i.e. the “self-made” riches are rather accepted while the latter the “undeserved”, “lazy” riches are seen more critically. This holds especially true for the recent protagonists of the financial crisis who still – despite their obvious failures demand more returns and/or boni than what is commonly regarded as appropriate.

However it is undenied that surplusses and the rather decentralized investment of surplusses is somewhat necessary in a technological society.

High risk investments carry a high risk of failure and thus they usually carry a high risk of personal loss, so it makes sense that high risk investments usually result in higher returns than low risk investments, in order to encourage them. However meanwhile a lot of returns in the banking businesses are exorbitantly high even without any personal risk at all. Without exagerating it can be said that the whole regulating mechanism of return vs. risk seems to be out of control – at least in the banking business.

In short –it seems that the question of how to deal with surplusses and the “return of investments” is a rather crucial point in any economic discussion.

In particular, apart from the disastrous performance of the banking business, it can be said that “capitalism” hasn’t given a satisfying answer to the question of how to encourage investments into ventures with from the outset low return or even with from the outset no return at all, despite the fact that these investments are often crucial for technological and societal developments. In my eyes this is a major flaw of “capitalism” or however you wanna call the current system.

Considering the above observations I thus started to think about: How could this flaw be mitigated ? and: How can one come up with something?

Inspired by the above described game and also by games like the Sims which usually mimick a real world in a virtual environment (and where the gameplay is supported by the fact that people like to “train” for the real world) I asked myself to what extent a “new investment system” could be implemented in a game in order to test such a system for the real world. One knows that such “experiments” have limited capabilities of providing real life evidences, however they may be not completely useless. At least it seems that the new possibilities in times of MMPORGS havent been fully explored in economic science.

My question turned thus into: “How can one set up an investment scheme (in a game like environment) which encourages investments into ventures with from the outset low return or even no return?”

Assume we have a kind of Sims game that is sort of a real life economic scenario. Could it be supplied with a different system of money distribution and storage than with the usual banking and economical scheme, in particular the system should be able to encourage investments into ventures with no return, but which are desired for technological and societal reasons? If yes – What could be possible? What can one think of?

Here – a very incomplete and rough (and probably not working) scheme as a start, which is mainly intended to encourage brainstorming about these issues rather than provide a solution.

Starting from the crucial point that surplusses are needed for investments, lets assume there exists a certain amount of surplus. In the game that surplus is just a fixed start amount of extra money. In reality and within a country one could find such a surplus in all assets which are not unconditionally needed for covering the running costs. Its a debatable point what these are, but in richer countries one can find a surplus. Or coltishly put: Schloss Neuschwanstein could a priori be liquidized. In some sense a countries surplus is an indicator of how a country florishes. If there is no surplus and if even running costs cant be covered a country is usually considered to be bankrupt.

Now a surplus could be in total centrally distributed by a government. However similar real life experiments like in a centrally planned economy showed that this was economically less successful. Nevertheless it is meanwhile also rather undisputed that governments or other societal institutions should be able to exert an influence on the distribution of surplusses.

Hence lets e.g. assume that the given surplus is evenly distributed among the participants (in order to give the most democratic chance of investment and in order to mitigate the problem of lazy riches).

Impose the rule that any personal surplus has to be spend within a short time span into various (short and long term) investments (so money has to be invested). The investments have to promise “benefits” that is either one can collect benificiary points (being e.g. issued by societal institutions prior to investment) for investments into ventures with low or no return or one can collect money returns. For the work which is related to the distribution of the surplus each participant gets a “wage” which can be used for one’s own consumption. The wage is dependend on the success of the investments. If an investment yields no return or no beneficiary points or worse if even the investment is lost then the participant is “punished”. E.g. in the worst case that is if the whole surplus is lost then the participant is punished with “getting no wage from surplus”. The actual size and dependency of the wage with respect to the earned returns and/or beneficiary points is thus an important parameter.

All made returns and beneficiary points enter the personal surplus and have to be reinvested. A venture may store collected investment and eventually issue interests until the needed lump sum is collected that would accomodate for the storage effect of banks.

It may be also be good to allow only for investments which are not ones own investments. This would e.g. encourage long-term investments, since the surplus could anyways not be spend on ones own projects and thus accomodate at least partially for the intermediation function of banks.

Note that the distribution of beneficiary points is also an important parameter. (please see also this randform post about assigning values) In particular beneficiary points may be distributed to such different things as newcomer bands, extraordinary social activities/aid or research in quantum gravity.

11 Responses to “on the return from investments”

  1. Sabrina Says:

    If I understood correctly you are unemployed, why don’t you make a business model out of that game prototype?

  2. Victor Says:

    oh oh girl, if you have these dangerous ideas to abolish banks or let them go bankrupt, this is communism! Aren’t you afraid that bankers may seek revenge and for example may hand out info about your bank accounts or so ?

  3. Victor Says:

    So you’re unemployed, but you won’t answer my comments.

    I have one more question for you. It would be interesting for me to hear what you say but the question may be a bit private: would you sleep with someone rich like a banker if he would give you 1 million dollars for this?

  4. nad Says:

    >Victor said: “Aren’t you afraid that bankers may seek revenge and for example may hand out info about your bank accounts or so ?”

    we have in Germany still considerably good data protection laws. so usually if info from a bank account would be released than this would be clearly an accident. These kind of incidents are mostly due to software bugs. Actually something like that seemed to have happened to me a couple of days ago, where my address was suddenly wrongly reported to Schufa ( the german central registry for banking affairs) as “changed” without me knowing about it. So I had to call up all the banks and tell them that they have the wrong address.

  5. Victor Says:


    where is a reply to my other comments. are you busy?

    >>”we have in Germany still considerably good data protection laws”<<

    did I scare you off?

    If you put your dangerous ideas in order and excuse
    yourself than everything should be fine.

  6. Victor Says:

    Still no answer.

    HELLO – did you fit in all your parameters?!

  7. streamfortyseven Says:

    Businesses which hire workers to add value to raw materials have the expectation that the workers will add value corresponding to at least three to four times that amount which the worker is compensated. This is part of how businesses make profits. Profit is defined as:
    Gross income from sales – (labor cost) – (cost of materials) – (cost of sales – advertising, etc) – (amortized cost of capital expenditures – equipment, buildings and maintenance)

    Businesses are constantly trying to minimize the costs above, so they pay workers the minimum of what it takes for the workers to show up, they pay the least they can for raw materials, and so on.

    If you replace workers by a machine, then you can significantly reduce labor cost, which is the real reason slavery ended in the American South in the 1860s – it was the introduction of steam engines and tractors which mechanized agriculture so that one steam tractor could do the work of 50 slaves in the field, so instead of housing, feeding, clothing, and otherwise maintaining 50 people plus an overseer, farm owners just had to pay for a steam tractor which with good maintenance could last for 50 years, and an overseer to maintain it and operate it. The former slaves migrated North, where they found (usually) low-paying work in the new industries there – producing mechanized implements. Since they did not produce much value, these workers were not paid much, even though their labor was dangerous and unpleasant and they had shorter life spans as a result.

    Banks are a confidence scheme, essentially. They accept deposits of money, and are capitalized by investors, and banks then loan out 95% of their deposits at interest, the loans secured by a property interest in the asset bought with the loan; they make money by the difference between what they pay on deposits and what they get in interest payments on their loan portfolios. Everything works out fine until a certain percentage of the loans go into default – the borrowers stop making their payments of interest and principal. At some point, the bank can’t make money, because this difference (known as margin) goes to zero. Also, the market value of the assets on which the loans are made can decrease, due to a drop in demand for the asset, so that if a bank tries to take back its property interest in the asset and tries to sell the interest, it loses money. If this happens enough, then the bank’s capitalization goes down, maybe quickly and sharply. At this point, it’s a possibility that the depositors find out that the bank is in trouble, and so they go to the bank to get their money out – and they find that they can’t – so the bank has to call in loans which are not in default and sell those property interests, which really screws up the economy, because that puts more people out of work, and you get a positive feedback effect. Without central bank intervention, you get a depression which will take years to recover from. This is amplified by a practice known as “fractional reserve banking”, which essentially allows banks to “create” money from nothing. As long as the economy is growing at a steadily increasing (exponential) rate, everything is fine; when the growth slows significantly, stops, or goes negative, then things screw up fast.

    Fractional reserve banking is a far more dangerous idea than “communism” because it depends on continued exponential growth – in a world with finite and depleting resources. It is guaranteed to fail, but before it fails, it tends to concentrate financial and property assets in the hands of a very few people and leaves the great majority impoverished.

    There is, of course, a solution, and it comes from the fact that Western economies are based on the use of oil and coal and nuclear power, which are all rapidly depleting, and non-renewable. Fifty years ago, if your television broke, you took it to a repair shop and got it fixed, nowadays, you throw it away and get a new one. The same thing holds for almost all other consumer goods, it’s a planned obsolescence, throwaway economy – but in the face of resource depletion, such a thing is no longer possible – so goods will have to be made to last, and people will repair them instead of throwing them away. Mechanized agriculture will also have to change, and more people will be involved in farming, and so on.

    Now, as to guaranteed annual income and the like, it’s sort of like guaranteed health care, and guaranteed retirement benefits and the like; it’s up to the people in a country to decide how they want to live, by and large. Is it a good idea to have a super-rich oligarchy living in gated compounds and shopping in closed shopping districts and the like while everyone else puts up with grinding poverty and little or no hope of having a better life, or would it be better for people to live on a more equal basis, with a good life available to all, a little bit better for some, but not so much that social order is disturbed by the existence of a permanent underclass? Which is better, given our situation of depleting non-renewable resources, Darwinian competition or cooperation? These are choices that are intimately tied in with the values of each society, each culture, each country…

  8. nad Says:

    thanks for the comment streamfortyseven.

    As I understood it is partially also a comment to my comment at Azimuths
    energy discussion.

    I also see fractional reserve banking as potentially dangerous and I think there are meanwhile also rather conservative people who have this opinion.

    I have put the draft of the article I had mentioned in the comment into a blogpost.
    It adresses also the problems of resource depletion.

  9. researcher Says:

    In particular beneficiary points may be distributed to such different things as newcomer bands, extraordinary social activities/aid or research in quantum gravity.

    That sounds almost as if you think that research in quantum gravity is not essential and should only be pursued if you have nothing better to do! You should be reminded of that it had been technological breakthroughs which furthered mankind!

  10. researcher Says:

    By the way what happened to your game article draft? The last published version is from 2011!!

  11. nad Says:

    researcher wrote:

    By the way what happened to your game article draft? The last published version is from 2011!!

    Thanks for asking, as was already said in here the contents may be a bit scattered. This didn’t change, on the contrary. But thanks to your comment I added a line in order to update the current status of the writings.

    researcher wrote:

    That sounds almost as if you think that research in quantum gravity is not essential and should only be pursued if you have nothing better to do! You should be reminded of that it had been technological breakthroughs which furthered mankind!

    I think that having a better understanding of the world around us is essential, but there is always a kind of trade-off between how much and what you can afford to investigate and your current situation.

    I am also not so sure that all technological breakthroughs and especially how they were deployed unambigously furthered mankind. In particular I do think that it gets increasingly difficult to control the consequences of socalled “breakthroughs”. I think here currently though more of brain and gene research than of quantum gravity, which has sofar less immediate applications with an impact on human life.

    So in short: it is clear that for things like space travel it would be good to get a better understanding of quantum gravity, but it is high risk research where even the possible manifestations of return of investment are not so clear and as pointed out above high risk investments are usually undertaken only if there is at least a hindsight of a possibility of a return and if you had/have enough surplus to live on with a total loss of your investment (where it has to be said that some connections of quantum gravity to superconductivity etc. which have been there for many years had given a small indication that the investment might eventually constitute a more immediate finding). So currently the “risk” in quantum gravity research is mostly “shared” via publicly funded institutions.

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