The Economics Of Fun

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Monday, November 19th 2007 - Metanomics was host to Ted Castronova, Associate Professor of Telecommunications at Indiana University Bloomington. He was interviewed by Robert Bloomfield of the Johnson School at Cornell and together they delved into some of the broader issues of how virtual economies can affect the real economy. You can download the event using the links above.

Below I've attempted to summarize what was said. While some points may have been missed, hopefully this will serve as a decent overview for those who wish to refresh their memories after having listened to the program.

Castronova's Work

Castronova's 2001 paper "Virtual Worlds: A First-Hand Account of Market and Society on the Cyberian Frontier" is still the #5 most downloaded paper on SSRN. What lead him to write it?

Largely this came down to him teaching a lot of things he didn't care about. After awhile, he started looking for fun. "I thought it would be a funny joke to write about something I was really enjoying and was finding meaningful, which was, playing in Everquest." After applying traditional economic tools to the game world, he made some surprising discoveries. The virtual world of "Norrath" had a per capita GDP somewhere between that of Russia and Bulgaria, and higher than that of China and India. The EverQuest virtual currency was even worth more than the Yen or Lira.

"So it sort of started off as a joke and stopped being a joke the more I thought about the long-run implications."

In the years that followed he co-founded a virtual world blog called "Terra Nova", began to help organize the "State Of Play" conferences, and founded another conference series called "Ludium" focused on play. He has continued asking questions about how to quantify things in virtual worlds, and has been spending time probing the cultural, social and policy implications that they have on the real world.

"What's happens if Second Life comes to occupy the time of hundreds of millions of people? What's going to happen on the outside? That's what I've been thinking about a lot in the past 2-3 years."

Castronova isn't a resident of Second Life, and hasn't been doing any studies there. He's often asked by his students: "Why aren't you here?" He's asked the same question about Eve Online, which has one of the most elaborate, fascinating and intense virtual economies there are. His reasoning: "I kind of got beyond economics very quickly as far as my interest in this area."

He's a traditional fantasy swords and sorcery lover, so that's where he has wanted to spend his time. His graduate students brow-beat him daily on these points, however, so Indiana University is now building an island in Second Life and are going to begin running a series of experiments.

The New Book
Entitled "Exodus To The Virtual World: How Online Fun Is Changing Reality", the book is an in-depth look at how virtual worlds might influence people's opinions on how real world economies and governments should be run. While the contents are too in-depth to cover in a single Metanomics session, Bloomfield was able to focus on two of the biggest topics covered: "migration" and "fun".

Migration

There are two economic theories that apply themselves directly to migration. "Hick's Theory Of Wages" (1931) states that people move from one place to another when it's better for them, especially if it's economically better. The "Becker Theory of the Allocation Of Time" (1965) states that people put their eyeballs and their minutes where it's best for them - explaining how people divide up their day.

Between these two theories you have people choosing where to be. The difference is that in the real world it's a slower process, which we could call "discrete migration". It takes awhile to move your body from one location to another. In the virtual world you can teleport from one place to the next, resulting in "instant migration".

If we assume that the economic effects are the same and it's just the way it happens physically that's different, this gives us some tools to work with when trying to work out how to attract people to a virtual space.

Bloomfield asked about migration: "Don't cultural and family pressures have as much to do with it as economics? [...] How do the structural frictions differ?"

In the real world these factors (cultural and family pressures) often combine to make migration a lower-middle class phenomenon. In Second Life's case the barriers to migration are "can you get a computer that will load Second Life, and does your Internet connection have enough bandwidth." Where Castronova sees things really taking off is in the low-tech virtual worlds like Barbie World and Gaia Online, where the system requirements are lower. This would indicate that migration in virtual worlds, too, is a lower-middle class phenomenon.

Fun

Why do we need a theory of fun?

We have an emerging industry of people making fun things, but currently the practice is hit-or-miss. What if we could clearly define fun and draw a map to reaching it? "There's something about the way we're wired that produces our interest in Tetris, the horse game, the assassin thing, leveling in World Of Warcraft and on and on. So there really needs to be research to unpack that I think."

Castronova's Definition of Fun:

1. The activity causes co-activation of motivational systems
2. The activity is possibly metaphorically relevant to survival
3. The individual's choices promote survival
4. The situation is known to be play

1. Getting excited by danger and by reward are completely separate operations in our brain. They happen independently. That means that we can get excited by both at the same time, and when we do it results in a potent experience. These two systems are close to the old brain, so they're going down to a deeper level of thinking than, say, satisfaction from completing a crossword puzzle.

2. and 3. also refer to this deep and primal level thinking. "Hunt a dragon for treasure" is used as an example.

4. There needs to be an understanding that what's happening is actually for fun. If you were fighting for your life for real you wouldn't be thinking of it as entertainment. Fighting for your life in a video game, however, can be a pretty good time.

"When I first got interested in Second Life in 2003-04 it was largely empty," said Castronova, so there wasn't that much to study. Now that it's full of a wide variety of content, however, he's starting to see areas that could fit his definition.

Saying that Second Life as a platform doesn't apply itself to the question. "Is Second Life fun" is like asking "is the internet fun". Maybe not, but there are things on it that could be. This is what he plans to find out.

Government Models In Virtual Worlds

"There's so much similarity in the way a virtual world development company thinks about what they're doing, and interfaces with their populace and executes policy." Castronova gave us a number of examples of this, including the cabinet-level office concerned with the execution of law being similar to groups making sure that the Terms of Service are enforced.

People in virtual worlds will see similarities between the way virtual worlds operate and the real one does, but in the real world the policies will be different. In Second Life I can instantly go anywhere, so why do I have to wait at the border when going from one country to another? It's these these differences in the way virtual and real worlds operate that people might begin to perceive as "unfair", and they may want to change the real world accordingly.

He pointed out that virtual worlds have a test server, and proposed changes get tested for weeks and months. In the real world we have people implement changes in law on-the-fly without any testing. If people were to do something like that in a game people would protest. "What do you mean you're implementing the changes in the game servers without testing?"

Castronova noticed was that while in many gaming worlds people tend to organize themselves into special interest groups ("Paladins", for instance) and petition the game makers through a representative in the same way that lobbyists do in the real world. He wondered why the same thing didn't exist in the real world.

In the backchat the comment was that we have "thousands of these groups", but Bloomfield pointed out that thousands is the same thing as zero. Some further comments about representative versus direct government were made here.

Closing Notes

• We have millions of people who, in their formative years, got the idea through gaming that if you need money there's someone standing around handing out quests to anyone who asks. This isn't true in the real world, but they'll feel like it should be.
• Once you make the playing field even and everyone starts from the same point, nobody cares about inequality anymore.
• In the policy area there are closed and open worlds. Second Life is an open world, it thrives the more its borders are porous. Closed worlds like WoW and Everquest are completely different, and thrive only with very thick walls.
• The last Ludium conference resulted in A Declaration of Virtual World Policy. This would have to vary based on the specific type of world (open vs. closed).

Questions

• How has your conception of the boundary between real/virtual worlds changed since your last book?

At first he thought the porous boundary between virtual and real economies was really great, but now he's becoming concerned that virtual world economies might push real world economies into a realm of fantasy.

• How has your understanding of real-world economies been affected by your understanding of virtual economies?

In the real world we're obsessed with economic growth. What's so fun about economic growth? Why grow the economy constantly?

In virtual worlds growth is a problem because that means each new generation has a harder time growing. What would the real world economy look like if it was designed to directly affect people's happiness?

What Do You Think?

What were your impressions of Ted Castronova's theories? How important do you think fun is to a virtual world's economy? Is his definition of "fun" something you agree with? Is there more to be said about "open" vs. "closed" worlds? Are there questions you might have asked? Leave a comment below and join the discussion!