Financial Analyst Calls Second Life a Pyramid Scheme 334
Petey_Alchemist writes "Silicon Valley gossip rag Valleywag is carrying a story about Second Life being a new spin on the old pyramid scheme.
The article, which consists mostly of selections from the report of financial consultant Randolph Harrison, suggests that not only are most people deceived about the amount of money they can make in Second Life, but also about how easily they can withdraw it. It says 'Like the paid promotion infomercials that run on CNBC, sadly SecondLife is a giant magnet for the desperate, uninformed, easily victimized. Its promises of wealth readily ensnare those who can least afford to lose their money or lives to such scam in exactly the same way that real estate investor seminars convince divorcees with low FICO scores to buy houses sight unseen with no money down.'"
Can't the same be said about the stockmarket? (Score:3, Insightful)
Now on computers! (Score:1, Insightful)
In other words: there's a sucker born every minute. This is nothing more than the same thing we've been seeing for decades now. Take an old concept, tack on "using a computer." and it somehow seems new and interesting. People get suckered. Now they're getting suckered with computers. So what?
One born every minute... (Score:3, Insightful)
Re:Can't the same be said about the stockmarket? (Score:5, Insightful)
No, because the value of a company's stock is based on real assets, liabilities, and income: all of which are easily translatable to real money, and which commonly pay cash dividends. This is commonly referred to as liquidity- the ability to transform whatever type of investment one has made into actual cash. The article asserts that transferring money from Second Life 'assets' to real-world cash is much more difficult than people are being made to believe, and that the only way to make money is to pass off those 'assets' to some other sucker.
Probably more like Vegas than pushy realitors (Score:5, Insightful)
Deceived by whom? (Score:5, Insightful)
Never in the game's help files or the blogs I read did it talk about using this thing as some huge income-generator. It's a game, and I find it pretty good at being a game. If on the other hand I wanted to work and make money I'd get another job.
This "OMG MONEYS!" hype seems to be confined the more sensationalist news outlets which I don't really take as gospel, and some third-party stuff. From my own short experience playing the game the actual financial rewards appear, just as in real life, to come to the people with the skill, time, and wherwithal to put into making stuff other people want to buy.
So who is doing any deceiving here?
Re:Can't the same be said about the stockmarket? (Score:2, Insightful)
Liquidity of the stock is usually the result of having enough "suckers" around to be interested in the assets.
Load of junk (Score:5, Insightful)
He also seems to have no grasp of how the currency exchange system works, either you sell automatically at the lowest asking price or price it yourself. Trying to buy and sell currency is worthless due to the fees involved and the relative stability of the market.
Any actual SL business will sell content to people, then cash this out on the official currency market every so often. It's really not hard to make a few dollars with no overheads. He does have a point on the circular nature of the market though, there are very few money sinks and the market is only healthy due to the fact new users are constantly joining.
Re:Deceived by whom? (Score:5, Insightful)
These people are only fooling themselves, making money in SL requires time and effort just like in real life. If you want it to provide income, you're going to have to treat it like a job. A job in a bizarre and very unpredictable economy, but still a job.
The really sucky part about this whole phenomena is that as these people gain publicity, their clout with the SL developers grows, and so the whole setup starts shifting in the favor of those who treat it as a job, at the expense of the majority, who treat it as some sort of a game. Linden Labs needs to be very careful with how they balance those two sides, because if all the "gamers" leave, then the bottom of the economy falls out, and all those virtual moguls won't be able to save SL.
Be Worried About Taxes (Score:2, Insightful)
The press does seem to have some kind of fascination about people making money off it, as they should, but for the wrong reason.
What I think the industry should be more focused on is not the dashed dreams of people hoping to make money in these virtual universes and failing but those who succeed in making money.
If you can turn around and sell virtual items for real cash, there is an argument to be made that receipt of those virtual items could be a taxable event. Be very afraid about how close we are getting to having to spell out the magic items we've received in WoW and their disposition as part of our income taxes.
Sound nuts? Hardly! [boingboing.net]
Re:Now on computers! (Score:5, Insightful)
Re:Can't the same be said about the stockmarket? (Score:2, Insightful)
Not for a long time. Most do not pay dividends, and their value has little relation to any actual assets a company might have.
Stocks are like baseball cards: pieces of paper with collector's value.
SL economy is not a traditional economy (Score:4, Insightful)
I think a lot of people have failed to realise some things about the economy of Second Life. Unlike our real-world economy, the world of SL doesn't have the same economic limits and drives that we're used to. If we do look at what's really going on there, we can see how things might change in our "real" economy in the future - and I don't just mean trying to do the same old "real" stuff virtually:
Now, the only real reason for any money in this game is for people to be able to buy items from other people that have created. However, if this system were to be abandoned in favour of, say, a FOSS-like model, people would simply make things that they enjoy creating, freely distribute them and likewise obtain items that they like from others without need for any financial exchange whatsoever. There certainly are many people already in SL who just give their creations freely without seeking any real payment other than a simple "thanks".
There is no reason that this shouldn't happen other than we're quite used to dealing with a capitalist system based on scarcity. If we ever hope to grow beyond our current real-world economics, it's certainly worth trying to experiment with alternative systems virtually.
Re:Can't the same be said about the stockmarket? (Score:5, Insightful)
Currency gets its value thanks to simple acceptance.
Poor Judgement costs money (Score:4, Insightful)
I am sure I am missing out, but lots of people have GIVEN me things that I assume cost someone money at some point. That of course dilutes the value of the investment. The pay back probably involves social status, similar to potlatch societies where whomever gives away more is the 'wealthiest'.
Clearly the actual issue is how to convert ANY of that into real value, in a way that economists can equate either directly or analogously to real world value, such as income or return on investment.
What this article does most effectively is highlight the lack of support for predictable commerce. The same is true in countries with unregulated financial systems, and the factors of anonymous commerce, no legal system, and essentially no reliable contract, means that the only commerce that is effective for most people involves commerce in which there is a low stake, which means that actual use and accumulation of wealth is both hindered, and less valuable.
This is a vending machine economy. Its based on a million players putting in a quarter in a slot machine, or buy a new outfit, face, body etc... Things that are specifically part of the online environment (playing with toys or enhancing your visual representation)...
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Second Life really is more interesting because it is the equivalent of a Graphical MUSH where all the users have the ability to create items. I can create any number of items, and give them away or clone them. A good item may be worth something but since any good item can be reverse engineered and distributed at no cost, there is little value to developing quality code except for social praise. Real designers and coders actually can earn good livings in the 'FIRST WORLD' so most of what you see is toys made by people for fun, which makes alot of sense.
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Last but not least, its a crappy environment for real development. It is harder to output text in any meaningful format. Thats an intentional crippling to force people who want to create content to have to pay to input graphics, rather than write code to actually draw graphics. Pretty regressive considering the direction of the web, which enables REAL commerce and has created a good amount of wealth.
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When SecondLife stops being a scam, and supports real internet technology and openness, perhaps it will also draw the kind of mindshare that will create real value and an honest marketplace, but that is a different economic model. For now, its mostly a place to play john and whore and part of that means paying, and if that happens to let your one dollar turn into 250, then the game seems more exciting. If a grown woman and parent of two actually believes that earning 185 dollars a month for being a whore and a mule for money laundering is good money, then I guess thats what she deems herself worth. Hard to argue with that sort of capitalism.
Re:Can't the same be said about the stockmarket? (Score:5, Insightful)
Arguably the dumbest 'smart' statement I've seen on slashdot in a while. The reality is that without day traders and the ignorant, things like heuristic trading schemes set up by large investment banks would be far less profitable. Real investors LOVE day traders and the ignorant, as they are the ones who are giving them money.
Yes and you would be right (Score:1, Insightful)
Another observation on the falsity of the economic trading system (because it isn't just stocks and shares we really mean is it when talking about stockmarkets) is how can there be more wealth than there are goods? At any moment whilst the cash machine of the super rich operates the wealth is greatly more valued than the sum of the real goods at its foundation.
I suppose if the super rich all more or less simultaneously attempted to spend their money hyper mega super inflation would hit and only they would be able to afford anything which would rationalise the value in my previous paragraph.
Meanwhile they don't have to do that because slowly over time they owned a bigger and bigger percentage of everything anyway but can't afford to rock the boat too much or they would have to grow there own food. Farming being the one of the most important jobs on my short list of most important jobs which doesn't include president, property tycoon or evil monopolist.
Re:Second Life? (Score:3, Insightful)
Yes and no (Score:3, Insightful)
Other Pyramid Schemes (Score:4, Insightful)
My stock shares of Coca Cola must be a pyramid scheme because (accounting for inflation) I paid more for them than the person before me, and he paid more for them than the person before him.
The Dow Jones Industrial Average (12560.56 at last glance) must be a pyramid scheme because it represents people selling stocks for more than they bought it for. It's going to crash, I tell you.
Scientific research might be a pyramid scheme because many successive discoveries rely on knowledge gleaned from past discoveries.
Why is it that insufficiently educated journalists can point to value-added commodities with accusations of the P-word for the sake of sensationalism? Has it ever occurred to them that "Pyramid Schemes" are neither illegal nor unethical as long as something of value changes hands, and especially if that particular something can be developed or improved? It becomes morally wrong when that something in question changes hands with an artificially inflated price that does not properly demonstrate its commensurate worth. Whitewater could be thought of as an illegal pyramid scheme. Ponzi's operation was an illegal pyramid. "Make Money Fast!" was an unethical pyramid, albeit not illegal.
There are many legitimate operations that can be thought of as a pyramid scheme, but if one starts thinking of them that way, please refrain from thinking the P-word is a bad thing.
Solomon Chang
Re:Just like first life.... (Score:5, Insightful)
Blaming the victim is trait that has become more common in the average American. Most educated people would agree that this common sentiment is not a good trait to have, and many say it's a sign of our increasing callous attitudes and selfishness, but what is the cause?
It has been proposed that one cause of victim-blaming is the "Just World Hypothesis". People who believe that the world has to be fair, may find it hard or impossible to accept a situation in which a person is unfairly and badly hurt for no cause or reason. This leads to a sense that, somehow, the victim must have surely done 'something' to deserve their fate. Another theory entails the need to protect one's own sense of invulnerability. This inspires people to believe that bad things to those who deserve or provoke it (Schneider et. al., 1994). This is a way of feeling safer. If the potential victim avoids the behaviours of the past victims then they themselves will remain safe and feel less vulnerable.
Supporters of this view (once referred to as "Job's comforters") must perforce accept that to do otherwise would require them to give up their belief in a just world, and require them to believe in a world where bad things -- such as poverty, rape, starvation, and murder -- can happen to good people for no good reason. The cognitive dissonance in doing this becomes too great, and results in victim-blaming.
So BVis, what do you think is wrong with you that makes you think this way?
Re:Can't the same be said about the stockmarket? (Score:4, Insightful)
>> order to lure investors. Once they have some investors coming in, they begin to pay back
>> the earliest investors in order to create hype and garner more investors. People make
>> money in ponzi schemes, but only by being at the top of the pyramid.
> So, you mean like the stock market?
No, more like 'Social Security'.
Re:Just like first life.... (Score:3, Insightful)
The world isn't fair. Once you accept that and take steps to be responsible for your own safety and your own actions, you'll do a lot better.
Re:Can't the same be said about the stockmarket? (Score:3, Insightful)
What are you talking about? Neither the article nor the post you replied to said anything about the value of the US dollar. The point is that if there were really a market for exchanging SSL and USD, as claimed, then there would be some price that represents the relative value of these two commodities that is "simply accepted", in your parlance. It doesn't matter what these values are "based on."
You cannot hit the bid in signficant quantities, but you can lift the ask in any volume you like - showing that this "market" is a scam.
Re:WoW! (Score:3, Insightful)
The bottom edge of the top 5% sorted by income isn't obscene -- I think that is somewhere around $300-$500K USD per year. It's hard to dismiss the value of a $500K CEO whose wheeling and dealing keeps two hundred other people employed at $40K+ each -- that's $500K propping up $8 million in salaries.
Now, the bottom edge of the top 1% is getting there -- I believe that is near $1-$3 million. At $1 million you're talking near $500 per hour or $8 per minute. That means it costs a Fortune 500 company $50 every time a VP takes a piss.
The trick is to get the IRS figures and find good values to delineate the range between "making a lot of money by producing a lot of value for others" and "making so much it literally is obscene". I used to have the numbers handy back when I liked to argue about things, but I've forgotten them now.
Re:Can't the same be said about the stockmarket? (Score:5, Insightful)
True enough -- but it is trust in something that has a certain reliability. Anyone who accepts US dollars in exchange for real goods is trusting that the US government will behave a certain way. That's a reasonable article of trust -- it is not the act of faith that some imply it is.
Trusting the government of Weimar Germany to behave similarly would be an unjustified act of faith.
Same for US treasury bonds. The buyer of such bonds is trusting that the US government will not default on the necessary collection of taxes and repayment of mature bonds, and that the US economy will not crash bad enough to be unable to make such payments. That too is a justifiable act of trust.
Of course we all disagree over just how justifiable that trust is. The world's collective estimation of our trustworthiness is expressed in the interest rate that bonds fetch on the open market. Trustworthy countries get to pay lower interest rates on their bonds; risky countries pay higher interest rates... just like any consumer loan.
Re:Can't the same be said about the stockmarket? (Score:2, Insightful)
Quite the contrary : what holds the US dollar afloat is the vested interest of foreign nations in form of the value of the massive reserves of this currency that they hold. If the US dollar would be worthless, then these reserves would be worthless. If only the US political will would matter, then these reserves would be voided, since they constitue a huge IOU from the US to these nations that is going to be leveraged in the future. So it is the very sovereignty of these nations that gives value to the US currency.
Think about what happens when you buy your first house : you get a house even though you can pay only a fraction of its value. The very reason that this can happen is that the people who can make it happen know that they can take the house away from you if you don't make good on the contract that binds you at that moment (your mortgage). If they know that you own such an arsenal as to make it impossible to take the house back from you, they wouldn't give you the house in the first place.
Re:Load of junk (Score:5, Insightful)
Re:Can't the same be said about the stockmarket? (Score:2, Insightful)
In a barter system, there is no question of valuation because whatever you are bartering (wheat for beef) has value to you. You don't care if the market for wheat collapses the next day, because the wheat has inherent value to you.
The problem is that bartering does not work for the number of products (and services) people want. So, you need a product to *represent* value - gold, silver, cigarrates, money, etc. It is important to understand that this product does not need to have inherent value - it only represents value.
Say we agree that plain white paper will be the mechanism by which value will be represented. The problem is that while some people work hard to create products with inherent value, I might just print plain white paper. This does two things:
1. I get to make 'money' without working as hard as you, which is not a problem in itself.
2. I dilute the value of plain white paper thereby indirectly stealing from you (this is called inflation).
This is why gold or any other rare commodity is a good currency (but not perfect like barter). I just cannot do make tons of gold and dilute the value - I have to do real work to mine the gold. The moment someone figures out a way to create tons of gold, it will not be a good currency.
The problem with fiat money is that the govt. can print it (or rearrange electrons) at will and steal money from you indirectly. The financial institutions (who you say will 'prop up' the dollar) always want more money pumped created so they can lend it out and make more money.
Re:Can't the same be said about the stockmarket? (Score:2, Insightful)
This is pretty much flat-out untrue. Financial institutions (e.g. banks) don't wait for the government to print more money so they can lend it out. While the U.S. government does print new money, most of the 'new' money that enters the economy is created by banks. Average Joe decides to buy a house, so he goes to the bank. The bank loans him money, and Joe buys his house. Wham! New money. That money didn't exist before, the bank just gave him money drawn from other people's accounts. So, while the bank is out this amount of money until Joe repays his loan, the bank doesn't tell the account holders that their money isn't in the bank, they need to wait for Joe's loan to be repaid. The bank simple hands them money out of the hard currency it has on hand. This effect is much more significant when banks loan large amounts of money to investors/corporations to create new businesses or expand existing ones. So, while the government does create some new money each year, most of the new dollars pumped into the economy come from banks.
Re:Can't the same be said about the stockmarket? (Score:5, Insightful)
Investors can be stupid and investors can be lied to. That does not make the entire pursuit worthless, nor does it mean that we have a better system. Hwang Woo-suk, the Korean scientist the forged his stem cell work, was payed very well, given a lot of funding, published in major journals, given academic support, and more.... up until the revelation that he was forging his work. So does this mean science is bad? No. It means that people are people and any human system is bound to have liars, frauds, crooks, etc. The trick is to pursue them to keep the great majority honest.
I wouldn't completely disagree with you here, but all institutions have the same kind of problems as they're staffed by people. We don't have a better alternative. It's better to allow people to under and over-react than to not allow them to react at all. In general the market prices things fairly efficiently -- the fact that it is very hard to beat the market consistently demonstrates this fact.
Re:Just like first life.... (Score:3, Insightful)
Purely unregulated economies dont' work. But there's more to a society than the economy.
Re:Just like first life.... (Score:3, Insightful)
You're not wrong, in the sense that there are plenty of people who suffer from that "Just World" problem. But using it as a method to attack anyone who judges another at fault for failing to apply even the most basic thought to a a significant action does not require that you subscribe to the Just World hypothesis.
People who subscribe to that will blame another for what essentially constitute random accidents - a car hits yours when you had right of way - why didn't you do a defensive driving course? people are idiots you know!
However it's not the same thing to find fault with someone who, due to their own failure to apply common sense to a significant action, suffers loss (not the same as requiring common sense for an everyday action, attention is not always available).
It is also not the same to find fault with someone in the abstract, vs a particular person. Ie, to say that in general, those scammed by 911 mails should have known better, that the entire thing is both too dodgy and too good to be true, is not the same as berating your grandmother because it happened to her.
People are always more willing to deliver an objective assessment in the abstract, when it actually happens to your lovely old grandmother who spent years in Nigeria in her youth helping their education system the cause-and-effect of judgement suspension is easier to follow and natural sympathy for a member of your tribe comes into play.
The tragedy is that people with a strong belief that you are correct result in a less resilient population. Believers who end up in politics attempt to create a legal environment based on the idea that people cannot be trusted to think, a self-perpetuating cycle once it gets bad enough - if you don't normally have to think while going about your day to day activities, it becomes harder and harder to blame you for not thinking when anything unusual happens, so more and more things have to be regulated to the point where it is impossible to come to harm no matter how stupid the action.
Not only is such an environment unsustainable (at least given our current technology level), it is severely counter-productive. Safety is easiest to apply to a narrow range of possibilities, and thus laws are made which subsequently restrict peoples ability to act in an intelligent, but uncommon manner, resulting in heavy efficiency losses overall.
So jidar, why are you mis-representing the views of people in order to make yourself feel superior, and why are you screwing up my society?
Re:Load of junk (Score:2, Insightful)
Who says entertainment has no value?
Nope. (Score:2, Insightful)
The 'goods' that are sold within SL have no value in real life, which makes the SL a closed system, which sustains itself only due to the new users who are constantly joining as you yourself stated. It is a pyramid scheme.
You're assuming an untenable boundary between the "real" and the "virtual" here. If people are paying real money to obtain those goods, they certainly have a real value.
There are plenty of business models that rely on more money coming in constantly for an indefinite amount of time. For example, the food industry. What's missing from this argument is a condition that's critical for something to be a pyramid: it must rely on an unsustainable continuous inflow of new money. There is no reason in principle that forbids that from happening in the Second Life case; if the demand for Second Life goods can be sustained indefinitely, then it's no different than any other commodity.
If you read TFA and think about it, you'll notice that the "pyramid" claim is the least precise and careful claim made in it. The real smoking gun, to my mind, is the claim that Second Life currency is controlled by a cartel that accepts real money in exchange for virtual money, and then puts in a price structure designed to do two things: (a) keep the said virtual money from being converted back to real money, and (b) prevent other people with big pockets to come in and compete with them. They certainly earn short-term interest on the real money that people trade into their pockets; TFA notes that the penalties they were looking at for big trades closely matched short-term interest rates, which supports the hypothesis that these penalties are, essentially, the cartel's way of charging you for the interest they projected to earn on the real money they're trade you back.