Second Life

Op/Ed: Financial Myth Busting Edition

Writing by Green Guy on Tuesday, 18 of December , 2007 at 8:26 pm

by Jessica Holyoke

In my time at the Herald, I’ve seen bank failures, aborted mergers, strange actions by the stock exchanges and company failures.   I’ve also experienced first-hand what happens when residents believe that we’re in a “virtual economy” or “fictional economy.”  Residents subscribe to a number of myths that affect how they view everything around them.

It’s a Virtual Economy

Many residents view the in-world economy as a virtual one.  A fictional economy is what the WSE describes what we are doing, most likely for legal reasons in Australia.  Just calling our economy fictional or virtual does not make it so.  We, as residents, buy and sell real things.  It is just that these real things are represented more by electrons then atoms.  These items we buy and sell are as real as software, pictures, stock options or futures.  I really own a SexGen bed.  I really own various dance programs.  I really paid someone to have a logo made in SL.  I don’t fictionally own objects and items.

When Ted Castronova wanted to study a virtual economy, he decided against using Second Life.  A number of people thought that was foolish because SL already has an economy.  But SL is not like other MMO economies for two reasons; the LindeX makes asset prediction impossible and residents do not make predictable economic choices. 

In World of Warcraft, a person enters and has no gold.  Players have to earn gold by grinding or maybe dueling other players.  If you see a level 10 and a level 70, it is likely that the level 70 has more gold and assets than the level 10.  And their economic choices are limited.  Both players are likely to spend on skills training, material or weapons that are appropriate to their class or race.

In SL, you do not have that same level of economic certainty.  Someone who’s been here for three years may have fewer lindens than someone who’s been here a week.  Possibly due to the newbie bringing money in or the oldbie taking money out or the oldbie getting by without any money and using freebies.  The LindeX makes basic asset predictions impossible when compared to a WoW situation. 

Purchasing decisions are also not easily predictable.  The Gorean slave girl, just for fun, might have bought a combat helicopter.   She can’t use it on Gorean lands, but there’s nothing stopping her from making that economic decision.  In WoW, her experience and in-game role would have prevented her from buying items she is not meant for.  In the real world, no one is able to just purchase a combat helicopter. In SL, those limitations do not exist.

Banks and Stock Exchanges in SL Are Bad Ideas

One of the beautiful things about capitalism is the ability for resources to be put to their best use.   Its the basis of supply and demand, but its also the basis for capital investing.  The safest thing to do with your Linden Dollars is to take them out of SL.  The second safest thing to do with your Linden Dollars is to leave them alone in your in-world wallet.  But if you leave your Lindens in your in-world wallet, they are not being put to use.  That’s where the banks and stock exchanges come in.

Say there are a hundred residents with L$100 they do not have a use for.  They deposit those Lindens in a bank which takes the L$100,000 and buys land.  The owner decides to develop it commercially so that he can have cash reserves, income generation and the ability to pay interest.  Those residents enabled a mall to be built, which further drives the in-world economy.   

In the stock exchange example, someone has a business idea, but they don’t have the money or capital to exploit the idea.  The entrepreneur holds an IPO to raise money.  The residents with left over Lindens buy shares of stock. In exchange for an ownership interest and a portion of the profits, they fund the entrepreneur’s venture.  The venture may do well, it may not.  Either way, the economy is growing based on the initial investment.

These investments are high risk.  An investor still needs to do research before investing just as an investor would do in the real world.  Additionally, that investment can be completely lost.  That does not make investing bad, just risky.

Failure Means Fraud

Once I was able to explain the details of the July Ginko Crash to a business person not familiar with all of the intricacies of SL.  As I’ve written before, the July Ginko Crash was due to the gambling ban and casino owners cashing out, accusations of being a ponzi, and technical difficulties with the Grid the weekend after the ban was put into place.  People were having difficulties withdrawing from Ginko, which drove down depositor confidence.  As I was explaining the details, the business person responded, how would any bank without insurance or government backing, deal with that kind of loss of depositor confidence and deposits? 

Sometimes entrepreneurs might not know what to do, either due to a lack of training or due to education not knowing what to expect in a SL economy.  Just because they fail does not mean that they are frauds.  This does not excuse all fraudsters, but you have to find more proof of fraud than just a bank failure.

If This is So Good, I Should Invest My Out of World Assets.

That is the worst advice anyone can give regarding SL investing.  And partially it goes back to the analogy of investing in SL being like gambling.  “Bet with your head, not above it.” Investing Lindens that are sitting in your in-world wallet is one thing.  Buying new Lindens simply to invest is another.  All of the real world protections, insurance, bankruptcy liquidation, government oversight, are lost if you invest your real world assets in Second Life.  Linden Lab takes many steps to keep the Linden dollar seen as a digital right and not a currency, so they will not step into the shoes of a government to protect your investment.  Additionally, it raises issues as to tax consequences for investments in SL with RW assets. It is better to leave your money outside unless you need it in-world for something that you personally are going to use, such as purchasing land or starting your own business, as opposed to investing in others. 

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