« April 2004 | Main | June 2004 »

Virtual Economies & Game Theory

Monday, May 31, 2004 | 07:05 AM


Fascinating story at the Canadian magazine Walrus (really, that's the name of it) about Edward Castronova, the economist who "discovered" the virtual world of Everquest On-Line and did a full blown economic analysis on it.

I vaguely recall this story hit either the WSJ or NYT a while ago (thus demonstrating the dangers of being an information whore). Regardless, there's a good column on it over at Slate (Fantasy Economics).

Castronova's discovery:

"He noticed something curious: EverQuest had its own economy, a bustling trade in virtual goods. Players generate goods as they play, often by killing creatures for their treasure and trading it. The longer they play, the more powerful they get but everyone starts the game at Level 1, barely strong enough to kill rats or bunnies and harvest their fur. Castronova would sell his fur to other characters who'd pay him with "platinum pieces," the artificial currency inside the game. It was a tough slog, so he was always stunned by the opulence of the richest players. EverQuest had been launched in 1999, and some veteran players now owned entire castles filled with treasures from their quests.

Things got even more interesting when Castronova learned about the "player auctions." EverQuest players would sometimes tire of the game, and decide to sell off their characters orvirtual possessions at an on-line auction site such as eBay. When Castronova checked the auction sites, he saw that a Belt of the Great Turtle or a Robe of Primordial Waters might fetch forty dollars; powerful characters would go for several hundred or more. And sometimes people would sell off 500,000-fold bags of platinum pieces for as much as $1,000."

As Castronova stared at the auction listings, he recognized with a shock what he was looking at. It was a form of currency trading. Each item had a value in virtual "platinum pieces"; when it was sold on eBay, someone was paying cold hard American cash for it. That meant the platinum piece was worth something in real currency. EverQuest's economy actually had real-world value."

Talk about Supply & Demand: Castronova demonstrated the old saw: the value of a thing is (at times) merely what someone else is willing to pay for it -- regardless of "intrinsic value."

The same thesis applies to any good or service traded, including the bubble in "beanie babies" or the intrinsically valueless dot com stocks . . .

While the internet bubble reached a peak valuation, its collective valuation was several 100 billion dollars; Even if you back out the surviving companies (eBay, Amazon.com, Yahoo!, etc.),you still end up with companies which had market caps in the billions. They were virtually and intrinsically worthless (Pets.com) then, and are literally worthless now (most of the rest).

Given the behavior of humans in crowds, it is little surprise that a virtual world such as EverQuest has a real world valuation:

"He began calculating frantically. He gathered data on 616 auctions, observing how much each item sold for in U.S. dollars. When he averaged the results, he was stunned to discover that the EverQuest platinum piece was worth about one cent U.S. higher than the Japanese yen or the Italian lira. With that information, he could figure out how fast the EverQuest economy was growing. Since players were killing monsters or skinning bunnies every day, they were, in effect, creating wealth. Crunching more numbers, Castronova found that the average player was generating 319 platinum pieces each hour he or she was in the game the equivalent of $3.42 (U.S.) per hour. "That's higher than the minimum wage in most countries," he marvelled.

Then he performed one final analysis: The Gross National Product of EverQuest, measured by how much wealth all the players together created in a single year inside the game. It turned out to be $2,266 U.S. per capita. By World Bank rankings, that made EverQuest richer than India, Bulgaria, or China, and nearly as wealthy as Russia.

It was the seventy-seventh richest country in the world. And it didn't even exist."

Fascinating stuff.

Incidentally, the writer of the Game Theory article is Clive Thompson, who excellent blog collision detection is well worth checking out . . .

Monday, May 31, 2004 | 07:05 AM | Permalink | Comments (0) | TrackBack (1)
de.li.cious add to de.li.cious | digg digg this! | technorati add to technorati | email email this post

CPI versus Personal Spending

Sunday, May 30, 2004 | 08:33 AM

Personal income grew in April at twice the rate of spending, boosting the savings rate to the highest level since last summer. According to the Commerce Department, Spending advanced 0.3%, while Personal income increased by 0.6% last month. Both numbers were 0.1%, ahead of expectations.

Let's break it down:

The Good News: This increase in income was the largest monthly gain since November's 0.6% advance. Disposable personal income, or income after taxes, climbed 0.5%, following a 0.4% advance in March.

The Bad News: Spending on durable goods, big-ticket items such as cars and appliances, rose 0.8%; Outlays on nondurable items such as food and clothing slipped 0.1%. Look for rising interest rates to negatively impact durables number going forward, while higher inflation eats into spending (goods purchased will have the ~same $ amount, but lower units sold).


The Ugly News: Inflation. A price index for personal consumption expenditures is rising, most especially due to food and energy costs. Beware the news releases that focus on ex- food + energy, as they are foolish knaves sent to waste your time.

We all wish our "personal-consumption expenditures were actually "less food and energy" -- but such is life on planet Earth. A boys gotta eat and get to work. That takes (duh) FOOD AND ENERGY.

The Really Ugly News: University of Michigan consumer-sentiment index dropped to 90.2 in May; Economists were looking for 94.4. Ouch.

Consumer Sentiment went south in May -- Iraq, Inflation, Gas topping $2 -- all soured consumers mood.

In sum, wage earners eked out a little more green, but then promptly handed it over to gas station attendants and supermarkets. Consumers weren't topo pleased with the situation.

Personal Income Grows 0.6%, Double the Rate of Spending
WSJ, May28,20048:53a.m.

Barrons Economic Calendar

Data Source: Haver Analytics

Sunday, May 30, 2004 | 08:33 AM | Permalink | Comments (0) | TrackBack (0)
de.li.cious add to de.li.cious | digg digg this! | technorati add to technorati | email email this post

Light posting ahead . . .

Saturday, May 29, 2004 | 08:49 AM

chair chill.gif

Enjoy the 3 day weekend . . .

Saturday, May 29, 2004 | 08:49 AM | Permalink | Comments (0) | TrackBack (0)
de.li.cious add to de.li.cious | digg digg this! | technorati add to technorati | email email this post

Economist Wanted

Saturday, May 29, 2004 | 08:39 AM


Steve Liesman has fun at the Chairman's expense (heh):

"Wanted: Economist with impeccable credentials. Knowledge of monetary policy a must. Should be a calming, paternalistic figure. Intuitive sense of economic trends desirable. Ideal candidate desires full employment and low inflation in equal measures. Ability to navigate Washington political minefields a real plus. Required skill includes talent for speaking -- at length -- and not saying anything.

Essential that candidate be independent but remember who offered the job in the first place.

Send resume and cover letter to 1600 Pennsylvania Ave., Washington, D.C.
To the attention of: Person TBD by voters in November."

The full article looks at all the potential replacement candidates from a possible Bush second term . . . Next week, John Kerry's choices..

With Greenspan's Time Short, Who Might Bush Pick for Fed?
The Macro Investor
Steve Liesman
WSJ, May 28, 2004

Saturday, May 29, 2004 | 08:39 AM | Permalink | Comments (0) | TrackBack (0)
de.li.cious add to de.li.cious | digg digg this! | technorati add to technorati | email email this post

Read it here 1st: W's Eroding Cuban Support in Florida

Friday, May 28, 2004 | 01:55 PM
in Media


Over two months ago (March 24, 2004), we cited polls indicating that Cuban Voters in Florida Wavering in Support for President.

Not just one, but two different polls.

Glad to we see Newsweek has caught up with the Big Picture. Can't blame them for being behind -- how could they ever match our manpower or budget?


Let me also welcome those of you joining us from the Washington Post, coming to read our "legal excerpt" (tm) from the American banker: Fed Chief's Calendar Includes More White House Face Time

Florida: Eroding: Bush's Cuban Support
Arian Campo-Flores
Newsweek, May 31 2004 (found May 28 2004)

Terror Warning Timing Questioned
Dan Froomkin
Washington Post, May 27, 2004; 10:30 AM

Friday, May 28, 2004 | 01:55 PM | Permalink | Comments (0) | TrackBack (0)
de.li.cious add to de.li.cious | digg digg this! | technorati add to technorati | email email this post

Follow Up: The Way the Music Died

Friday, May 28, 2004 | 12:32 AM


Tonite, I watched the Frontline show, "The Way the Music Died."

It was kinda of interesting, but all told, rather disappointing. For a discussion on the economics of the music business, it was shockingly scarce on, well economics.

The show:

• never even mentioned high retail prices;
• made no mention of price fixing;
• hardly talked about technology;
• did not discuss consumer time pressures;
• made no mention of the RIAA;
• did not discuss the inherent genius of suing their clients;
• failed to discuss the industry's anti-consumer protectionism;
• only vaguely mentioned file sharing;
• ignored competitive pressures from other entertainment (DVD, Vid Games, Internet);
To their credit, there were several spirited discussions on the negative effects of radio ownership consolidation to their business model, especially ClearChannel. As an example, KCRW 89.9, an independent station in Los Angelos, first "broke" Fiona Apple, Coldplay, and Norah Jones. The implication is that a broader, less consolidated radio industry would be more experimental, "break" more acts. The tiny Clearchannel determined play list as the root of all evil was hardly discussed.

There was alot said about the decreasing quality of music, as the industry focused (thanks to MTV) on what bands look like -- Pretty! -- rather than what they sound like. David Crosby singled out Britney Spears (not much of a reach there) as the prime example.

As a counter example, one of the producers mentioned that good creative music still sells: Outkast (8 million records sold), Eminem (8 million), 50 Cent (6 million sold) and Norah Jones (6 million). Despite downloading and everything else, these artists connected with fans and sold lots and lots of albums.

There was also a lot of hand wringing about the -- horror! -- corporatization of music, as public firms were forced to meet quarterly numbers -- something this business is particularly ill suited for.

Lastly, I was quite surprised to hear that Best Buy, Wal-Mart, and Target account for 50% of all sales. That seems way higher than the numbers I've been looking at (more like 30% and growing). If anyone can validate this data, I;d appreicate it . . .

Friday, May 28, 2004 | 12:32 AM | Permalink | Comments (6) | TrackBack (0)
de.li.cious add to de.li.cious | digg digg this! | technorati add to technorati | email email this post

The Way the Music Died

Thursday, May 27, 2004 | 03:55 PM
in Music


Be sure to catch the Frontline show tonite:

The modern music scene was created in 1969, at Woodstock. Half a million fans, dozens of artists, and the politics of the times came together as a big bang moment that eventually would generate billions of dollars. But over the last twenty years, MTV, compact discs, corporate consolidation, Internet piracy, and greed have contributed to a perfect storm for the recording industry. FRONTLINE examines how the business that has provided the soundtrack of the lives of a generation is on the verge of collapse.


Thursday, May 27, 2004 | 03:55 PM | Permalink | Comments (1) | TrackBack (0)
de.li.cious add to de.li.cious | digg digg this! | technorati add to technorati | email email this post

Confirming a Market Turn

Thursday, May 27, 2004 | 01:38 PM

Last week, we discussed how the Dow Transports have not “confirmed the new low in the Industrials." The Transports did not create a Dow Theory Sell signal. As we previously wrote: “Unless and until that happens, the excessive bearishness leads us to anticipate a strong bounce back rally.” So while waiting for a Dow Sell signal, we also were awaiting a follow-through confirmation day.

The “follow-through” methodology simply looks for a strong rally on any of the major indices of 1% or greater on better than the previous day’s volume. I like to see better than the 30-day average volume. This confirmation day ideally shows up in the 4th through 7th day following the first day of higher trading (post-reversal).

Tuesday’s action saw Nasdaq surging 2.2% in trading on 24% higher volume than the day before. That certainly qualifies as a confirming follow-through day. In our view, these are a reliable means of determining whether a reversal is a mere “dead-cat bounce,” or the start of a more lasting move.

Why does this method work? After the long sell off, anyone who wants or needs to sell has already done so. With supply drying up, the market finds an uneasy equilibrium. It takes very little additional buying to ignite a move up. Short covering often starts the process, than institutional buyers start accumulating shares, which draws the attention of the Technicians. Finally, the momentum players hop on board - and we are off to the races.

Additionally, despite the expected seasonal “Sell in May” weakness, the four-year presidential cycle continues to work in the Bull’s favor. As the nearby chart shows, the market has a tendency to rally, starting around June, in presidential election years.

That suggests to us that the next four weeks leading up to the Fed meeting and the Iraqi sovereignty handover could be especially volatile. Traders are expected to be positioning themselves in front of this event -- and as this occurs, it would conform to our recent reversal rally thesis.

Tuesday’s action confirms our bullish stance from March 14th. We’re now looking for another follow-through day, on even stronger volume sometime over the next 5 trading days. It is probably too early to say that today is that day. But if we do get further confirmation, it would conform to our expectations for a new leg up, which we believe could last anywhere from two to six months.

Note: A much longer version of this was published at The Street.com (by subscription) here: Confirming Market Turns.

That column was a follow up to "Timing Market Turns."

Thursday, May 27, 2004 | 01:38 PM | Permalink | Comments (0) | TrackBack (1)
de.li.cious add to de.li.cious | digg digg this! | technorati add to technorati | email email this post

The Chart of the Day: Average Election Year (Dow / 1897 - Present)

Thursday, May 27, 2004 | 01:25 PM

The Chart of the Day observes “the stock market has a tendency to be somewhat choppy during the first five months of an election year, but prospects tended to improve (on average) as the November election approached.

Average Election Year (Dow / 1897 - Present) election_year_rally

Source: Chart of the Day, Pinnacle Data

We agree. This potential June - November rally is very consistent with our “Market Reversal” thesis of late.

Random Items:
Why the AG can't lose in Grasso case
WSJ: Battleground States
Is Google Losing IT's Cool?
Eight Ways China Affects Our Lives Now
Nixon joked about nuking Congress (not a bad idea)
Toss Those Trashy Romances: Invest in These Beach Reads

Quote of the Day:
"People who can take a risk, who believe in themselves, enough to walk away [from a company], are generally people who bring about change.”
- Cynthia Danahar, Hewlett Packard’s medical Products GM

Thursday, May 27, 2004 | 01:25 PM | Permalink | Comments (0) | TrackBack (1)
de.li.cious add to de.li.cious | digg digg this! | technorati add to technorati | email email this post

Shrek Wreck

Thursday, May 27, 2004 | 06:54 AM
in Media


Tuesday's comments (Blame it on the Locusts) which mocked the absurd rationalization out of retailers, was picked up by Jesse Eisinger's Ahead of the Tape column "Shrek Wreck" in the WSJ today. Jesse is a relatively rare breed -- a financial reporter who allows (or is allowed) his sense of humor to find its way into his writing:

"They put movies out in the summer but apparently nobody told the nation's retailers.

The International Council of Shopping Centers this week blamed "Shrek 2" for weaker-than-expected chain-store sales. Well, if they blamed what is likely the real culprit -- high gasoline prices -- "it would horrify the shareholders" of retailing-company stocks, Barry Ritholtz, strategist for Maxim Group, says. "I fully expect them to blame locusts one of these days."

Better hurry. If retailers don't do it now, they will have to wait another 17 years."

One of the side effects of all the corporate and Wall Street scandals has been the increased value of "truth telling." Would these sort of snarky sarcastic observations have made it into print 5 or 10 years ago? I doubt it.

Since I am not seeking investment banking business, I call 'em as I see 'em, and let the chips fall where they may. There is a premium of sorts for the straight dope these days (Go figure). Lets hope it lasts . . .

Shrek Wreck
Jesse Eisinger, Ahead of the Tape
WSJ, May 27, 2004; Page C1

Thursday, May 27, 2004 | 06:54 AM | Permalink | Comments (0) | TrackBack (0)
de.li.cious add to de.li.cious | digg digg this! | technorati add to technorati | email email this post

Recent Posts

December 2008
Sun Mon Tue Wed Thu Fri Sat
  1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31      


Complete Archives List



Category Cloud

On the Nightstand

On the Nightstand

 Subscribe in a reader

Get The Big Picture!
Enter your email address:

Read our privacy policy

Essays & Effluvia

The Apprenticed Investor

Apprenticed Investor

About Me

About Me
email me

Favorite Posts

Tools and Feeds

AddThis Social Bookmark Button

Add to Google Reader or Homepage

Subscribe to The Big Picture

Powered by FeedBurner

Add to Technorati Favorites


My Wishlist

Worth Perusing

Worth Perusing

mp3s Spinning

MP3s Spinning

My Photo



Odds & Ends

Site by Moxie Design Studios™