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The Actuary The magazine of the Institute & Faculty of Actuaries
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Virtual worlds

ave you ever thought that your life was a big computer game? Have you ever thought that the film The Matrix was not far off the mark and that the real world and the virtual world could converge?
In 1999, Verant Technologies launched an on-line game called Everquest. The game involves players creating characters, popularly known as ‘avatars’ (avatar means ‘incarnation’ in Sanskrit) who live in the world called ‘Norrath’, which exists on servers. Moreover, the avatars interact. They earn and spend income and have particular traits, and interact to tackle challenges in the world of Norrath. It is these behaviours that fascinate the outside observer.

Characteristics of avatars
Edward Castronova (2001) carried out one of the first studies of virtual worlds. He describes how the virtual world contains similar socio-economic challenges to the real world. There are also contrasts to the real world. Avatars may have to kill monsters. They may be able to fly, teleport themselves, see for miles, or hypnotise other avatars. Time in the virtual world is similar, though not identical, to the real world. Escaping the virtual world can leave your avatar in the same location ready for when you rejoin the virtual world.
A potential beauty of online gaming is that everyone starts equally with a given endowment. The endowment can be exchanged for personal characteristics. You could be strong, beautiful, wise, or be able to fly, but ultimately, avatars are created on a fair basis. Castronova concludes that in such a situation, inequalities arise solely because of choices made when the avatar is born and the future behaviour of the avatar in the virtual world. Inequalities should not arise because the avatar’s creator is wealthy, something that characterises the real world.
Castronova observed in 2001 that ‘equality of opportunity’ was breaking down and this does seem to be the case. Visiting the introduction websites of various online virtual worlds suggests that players can acquire assets by converting US dollars into resources used in the virtual world, such as land. Virtual worlds and real worlds look similar in this respect. Inequalities in the virtual world can arise because the avatars creator is wealthy.
Avatar characteristics give rise to two developments. First, avatars specialise. If, for example, an avatar has ‘healing abilities’, they ought to exploit this ability. If an avatar is strong, it can specialise in fighting. Moreover, as avatars repeat behaviours, they get better at them.
Second, avatars have incentives to socialise and form groups. Suppose the challenge is to fight a dragon. A strong fighter and a weak healer have incentives to unite. Forming friendships in virtual worlds requires much time from the game player as does forming friendships in the real world.

Scarcity is fun
Life in the real world is characterised by scarcity. In the virtual world, resources are also scarce. Prior to the creation of interactive games in virtual worlds, the first virtual platforms were not characterised by scarcity. They allowed users to create avatars with limitless abilities. Avatars could fly, have ten arms, and breathe fireballs: the only constraint was programming ability. Avatars did not need to compete and did not present a real threat to each other. Unsurprisingly, virtual platforms characterised by this type of avatar have been a commercial failure. In contrast, virtual worlds characterised by avatars that compete in a world of limited resources have been a commercial success.
The irony seems to be that scarcity is fun. What can explain this paradoxical observation? Castronova suggests that a world with constraints creates the possibility of achievement. The ambition to achieve something with the avatar creates an interest in its wellbeing!

The future of the virtual world
What holds for the convergence of the real world and the virtual world? Castronova in a recent interview with Business Week describes the potential situation eloquently:
‘I like the body. I was watching a ballet recently. I was crying because I was thinking the bodies are so beautiful, and we’re losing the body. I’m just afraid of losing the body.’
Castronova has a point. We can buy groceries from online retailers. Some online retailers allow customers to create an electronic body so that the purchase of clothing is easier.
We could guess that the commercial impact of on-line virtual shopping centres is astronomical. We may guess that only a few virtual shopping centres would survive. If a large number of people use a certain virtual shopping centre, more retailers would wish to locate to the virtual shopping centre as they can benefit from a large marketplace. However, the location of more retailers to a virtual shopping centre would attract even more customers.
What could be the impact on money? Online games in virtual worlds have their own domestic currency. If the virtual world currency is tradable for real world currencies, could we see a competition of currencies and the eventual survival of only the best currencies, as famously described by Friedrich Hayek?

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