[Mud-Dev] Broken currencies

Matt Mihaly the_logos at www.achaea.com
Thu Apr 5 00:13:38 New Zealand Standard Time 2001

On Wed, 4 Apr 2001, Phillip Lenhardt wrote:
> On Tue, Apr 03, 2001 at 10:24:46PM +0000, Matt Mihaly wrote:
>> On Tue, 3 Apr 2001, Brian 'Psychochild' Green wrote:

>>> A basic tenet of economics is that value is determined by utility
>>> and scarcity.

>> Not to split hairs but value is not so neatly defined.

> Regardless, players value things. And many muds want players to
> quantify their valuations in terms of the mud's currency (presumably
> this is desireable because "that's the way the real world
> works"). The art is in how a game designer achieves that goal.

Yes, but why? I've never yet seen anything that is desirable solely
because it's the way the physical world works. The virtual world isn't
the same, so blindly trying to simulate the physical world in it
simply isn't going to work in exactly the same way.

If players don't feel they need the currency, is there a compelling
reason to try and force them to use one? I'm not arguing either side
here, just asking the question. I'm not sure I have an opinion on it.

>> And that's what mind-bendingly smart professional economists forget
>> all the time. That's what nearly sunk the world economy in 1998
>> when Long Term Capital Management went down (with 2 Nobel Laureates
>> in economics on their staff) in response to the baht's fall.

> Many economists disagree. If the Federal Reserve Board _hadn't_
> bailed out LTCM it may not have failed at all. And even if it had
> failed, it wouldn't have taken the "world economy" (whatever that is
> :) down with it. Moreover, LTCM didn't nearly fail because of
> people's perceptions of value (though that may have been a factor in
> the bailout itself).  It nearly failed because LTCM's analysts
> thought that their portfolio was diversified over markets with very
> low cross-correlation. And when all those markets all moved in the
> same direction, against all their data, boom! In fact, perception
> _couldn't_ have affected LTCM, since their strategy was secret (and
> so complex that the majority of LTCM didn't even understand it).

Well likewise, many economists agree. And what do you think makes
markets move? It's perception, and nothing else. People's perception
may change due to new data, but perception is, in the end, all that
matters to the markets. Is there really a different of 95% between
CMGI's worth a year ago and it's worth today, if you choose to think
of value as an objective? I don't think so. People's perceptions of
its value have changed dramatically too.

Furthermore, in the case of LTCM, "the markets" didn't move against
it, because it had almost no directional trades. Directional trades
are rightfully considered highly risky, and LTCM's entire strategy
revolved around limiting risk (a necessity given their massive
leverage). Most of their trades were convergence trades, meaning they
were betting on the spreads between two similar (or not-so-similar)
financial products narrowing. A simple example is that Royal Dutch
Shell are actually two companies with two stocks. They calculated that
the prices of the two stocks were too far apart, so they bet on them
converging. Or, going long on, say, German 10 year bonds and shorting
the five-year bonds because their mathematical models (all based on
prior market behavior) told them to.

In the end, I believe that LTCM's fell into the academic trap that
seems to suck in a lot of top economists. They acted as if other
traders were individuals who would act with complete logic. More than
once the LTCM guys were quoted as saying that the only thing that
could kill them was the proverbial "100 year storm" in the financial
markets. Of course, they were completely wrong and vastly misestimated
potential volility by ignoring the fact that what moves markets is
perceptions, and perceptions can create feedback loops that lead to,
say, the "irrational exuberance" of pre-April 2000, or to, say, LTCM's
fall. With oil in the shitter (Russia's chief export), it was
practically criminal, in my opinion, for banks like Goldman Sachs to
be urging its customers to swap their short-term russian notes for
long-term bonds. They did it for the same reason that two of LTCM's
top traders (Victor Haghani and Gregory Hawkins) kept insisting to
people that their Russian bets were fine, because "Nuclear powers
don't default." Their perception was not anchored in anything but a
desire to believe that, and of course they were wrong, and the chain
of events that resulted destroyed the largest fund in the world (2.5x
the size of Magellan at its peak), and I believe did nearly cause a
worldwide recession as a result.

>>> Currency is a bit odd in this respect.  While gold or the funny
>>> colored paper in my wallet doesn't always have inherent utility,
>>> society has agreed that it can be exchanged for goods and
>>> services, thereby giving it utility.  Of course, a measure of
>>> scarcity makes for a better currency; for example, the paper in my
>>> wallet tends to have very specific identifying marks to separate
>>> it from forgeries.

>> Gold has utility though. It looks pretty and it's very
>> malleable. That's the original reason for its value. Now, of
>> course, it's a bit self-fulfilling as just saying "gold" conjures
>> up images of wealth.

> The use of a currency is not about scarcity or utility. It's about
> volatility. Forgable currency is volatile currency. Currency tied to
> a quantity of a stable physical object (eg gold) is less volatile
> than one tied to an unstable one (eg the number of cows you own not
> yet infected with hoof and mouth). The sucession of mediums of
> exchange has mostly increased in stability. If you can't make
> assumptions about the value a currency will have tomorrow, you are
> safer bartering.

That's not entirely true at all. The use of a currency most definitely
is also in making commerce easier (barter is expensive to both

> Barriers to use of a currency can actually be good for an economy,
> as it can greatly reduce its volitility, providing stability and
> predictability to the economy based on it.

Why are these good things in a game? I'm not saying they aren't, but
the goals of an in-game economy are not the same as the physical

>> The other problem I can see is that since there isn't really a way
>> to earn interest, or to invest, then _any_ currency inflation is
>> going to kill much of the value of the currency. Some inflation is
>> acceptable to people in the physical world because it's a natural
>> effect of economic growth, and because you're able to make money
>> with your money at at least an equal rate to the rate of inflation.

> There many ways to earn interest and invest currency in a mud. If I
> give you 100 gold to buy platemail so you can tackle richer
> monsters, on the condition that you give me 110 gold in a week
> (presumably from those monsters), that's an investment. A guild
> could easily manage a pot of money they use for buying shops or
> equipping raiding parties that is repaid to those who threw in plus
> a profit share, that's interest.

In one of my other posts, I mentioned that though there is opportunity
to use your money to make a bit of money, it is extremely limited. The
economic and legal mechanisms in the games don't support it, and for
good reason. Most gamers are not, I suspect, interested in serious
economic simulations. I'm into that sort of thing, and I don't think
I'd be interested in a game with serious financial markets in it, as
hell, I can just do it in the physical world, and it'll be a lot more
complicated and in-depth than any game will manage (though of course
my risk is a lot higher in the physical world than in a game).

Having said that, I'm going to be concentrating on Achaea's economy
within the next few months sometime, and I'm going to try and
institute an interesting economy. I'm not sure how well I'll manage,
as my math skills are not up to par, but I'm hoping to at least be
able to codify ways for people to express entrepreneurship aside from
going out into the woods and chopping wood repeatedly or going into a
mine and mining repeatedly (ie a resource management game with the
resources being NPC workers, their supplies, etc).

Actually, I think I'll start a new thread on this in another post.


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