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.'"
WoW! (Score:2, Interesting)
It's not easy to make money in your First Life either, therefore, real-life must be a pyramid scheme. Damn you, God, you sly bastard!
Just like first life.... (Score:5, Interesting)
The same adage works in both worlds: "If it sounds too good to be true, it usually is."
I've spent considerable time in SL, and have spent a grand total of $20 in my time there. I've made small amounts of in-world cash through various jobs. I tune out the scammers in SL just like i do in RL.
Anyone that gets scammed like this (in either world) deserves to be parted from their money. Anything we can do to make stupidity painful (or at least expensive) is OK in my book.
Second Life? (Score:5, Interesting)
Compared to other online communities or games, Second Life is miniscule.
"...only are most people deceived about the amount of money they can make in Second Life, but also about how easily they can withdraw it."
Yeah. Right. The reason people start playing Second Life is because their First Life is boring or sucks. Not because they "heard how much money they can make off it."
Re:Second Life? (Score:3, Interesting)
I think that you are right about the majority of people using Second Life, but I personally know people who do Second Life for a living.
There are people who hear stories about making money from Second Life and pick it up for that reason, but I think the point that the article fails to get is that it is not the creators of the game saying it.
Well.. (Score:5, Interesting)
That's just silly. If anything, it's closer to a pure meritocracy than anything - there are some stunningly creative people in there (apparently with LOTS more time than me). There are a lot of things I'd be interested in exploring DESPITE the horrendous lag and 1992 graphics. Hopefully these creative people can sell their work for Linden$ and turn that into cash based on market forces.
At some point, people have to be responsible for their own actions. It's 'caveat emptor' for the computer world, which itself is capitalist Darwinism that is essentially no different than any OTHER non-computer capitalist mechanism.
If I enter 2nd Life with no knowledge of what I'm doing, and expect to "make ton$$$ of money!", I'm probably going to waste my time (and if I'm stupid enough to spend real money, I'll lose that too). How is this ANY different than if I buy a franchise restaurant without knowing anything about the business, or start day-trading stocks knowing NOTHING about the market? In every case, my ignorance will cause me to make mistakes (at best) or even be exploited by more savvy actors (at worst) but either way, the ending will not be happy for me.
In that sense, 2nd life is no different than the real world.
Re:Just like first life.... (Score:5, Interesting)
You must just love it when grandmas who have only just discovered the internet lose their life savings to PRESIDENT UBUNTA OF NIGERIA.
It's a game! (Score:4, Interesting)
I got into SL a few months back mostly out of curiosity. I didn't buy into the hype being generated by the media and checked it out because I was intrigued (as I have always been) at the concept of virtual realities. I was always a big fan of Gibson and the Cyberpunk novels in general and so I already had a "primer" in the thoughts behind virtual worlds.
Now, SL is not perfect. Not by a long shot. It's sometimes laggy, crash prone and buggy... but it IS enjoyable. I have friends I made through SL whom I probably would never have met in RL. I used to get on IRC a lot about a decade ago, and this provides similar interaction in my opinion. I enjoyed IRC because at the time I lived in East London, and getting on IRC provided me a way of meeting and communicating with people all over the world. Although now I've not logged into IRC in 7 or 8 years some of those same people are still my friends, and they were instrumental in helping me when I decided to move to the US 10 years ago. I don't predict I'm going to make another similar move, but SL provides me with the same sense of community I got back then.
Now, as far as the pyramid scheme thing goes... please! Take a look through secondlife.com (the official site). Although the idea of selling your creations or renting property is discussed, it's not plastered on the main page "Make Massive $$$$$$ Now" or something like that. Linden Labs for all their faults are selling SL as what it is; a virtual world, a community and a creativity tool. If you are creative enough and good enough with the built-in building tools, then you can sell your wares to others and make a little cash. I know some people who do this and make enough in-world L$ to "shop" occasionally. Sometimes they even make enough that they can "own" a small plot of land and have their monthly fees covered by their sales. I have never known anyone personally who makes a massive profit. In that regard, it's more like real-life... if you have a marketable skill (avatar building or building models of ships, houses, furniture etc.) and know how to market it properly you can make some in-world money. If not, you won't. It's that simple. There are no more huge opportunities to make "phat cash" in SL than there are in real life. The only advantage of SL is that it's still a relatively untapped market if you're creative enough.
Hell, I make some L$ in-world by creating real art. I draw, sometimes ink and paint... then I upload a texture and map it onto a simple prim with a nice frame... voila... one saleable item that people will buy to hang in their property. I don't make much, but I cover expenses... and I get to keep the original
The media has created the pyramid scheme, not SL... and certainly not the majority of the denizens of that virtual world. They're the ones selling the idea that you can get rich quick in SL... Linden I don't think has ever claimed that. Oh, and the SL "millionaires"? Have you seen the exchange rate of L$ to USD? An SL "millionaire" probably has as much in their "bank account" (read that as SL account) in real world $ as I do in my bank account. I am not rich... in fact there are months I juggle bills like everyone else. Plus, I have to note that there were probably more scams being thrown at me in IRC 10 years ago than I have seen in SL. It's just the media ignored IRC because it wasn't "cool" to be geeky back then. The same things have happened... they just have an extra coat of polish and eye-candy.
Re:Just like first life.... (Score:5, Interesting)
[rhetorical]Why does the internet have anything to do with this?[/rhetorical]
If grandma received a letter in the mail from the PRESIDENT UBUNTA OF NIGERIA what are the odds of the scam working? I would say it's less likely to work with snail mail based on purely nothing other than I think that since the internet is much more convenient and "magical". It's almost effortless to for people to just click reply and think, well, it can't hurt.
A previous landlord of mine, who I figured was quite intelligent (he did have a phd in geology and was a professor) received a friendly note from our friends in Nigeria. He mentioned it to me and I explained to him how the scams work in detail. He said he was going to try seeing what he can get out of it, since some guy from "Canada" (since it's not Nigeria it's okay right?) had contacted him. Four checks came in with the sum of about 100k, he cashed them. I told him to not do anything at all, don't send these guys money, ever. Few weeks later he stopped by my place and said: "I'm sorry, but, you were right, I'm in the hole 300k. I've made arrangements with the bank to start repaying the money". The bank actually managed to recover all of it eventually (he had wired some people money and then the Nigerians withdrew even more). I can't believe he was actually thinking about just paying the bank back over 40 years.
I really don't know if it's just pure stupidity or not.
The Linden is just another fiat currency. (Score:2, Interesting)
"In economics, fiat currency or fiat money is money that enjoys legal tender status derived from a declaratory fiat or an authoritative order of the government."
It should read: Fiat currency is money that is backed by the trust in the promise that goods will be delivered in exchange.
Neither the Euro nor the "modern" Federal Reserve Dollar are backed up by anything but promises, they are fiat currencies.
What's more, the dollar is given out by a _private corporation_: "The Federal Reserve".
If you give it enough tought you will find that the Linden has no more and no less substance than the US dollar. The only real
difference between the two is that the USD is backed by a bunch of exceedingly tougher thugs who may or may not suffer the
Linden.
Re:SL economy is not a traditional economy (Score:5, Interesting)
People in SL won't abandon the economy for a "FOSS approach", and I say that as an OSS advocate myself.
The thing is that no real cash would actually make SL a less impressive place. Let's suppose you want for whatever reason to look like your RL self. Right now you can hire an artist who will tell you what sort of photos they want of you, and will then create textures and clothes in the right shape. They get cash, and you get to look like yourself.
On the other hand, who will bother with that in a pure "FOSS" environment? It's tedious work. The same way, OSS does badly in areas like accounting packages. Working on the kernel is interesting. Writing code for dealing with some obscure tax regulation is boring. Making some random guy's nose look just right is boring.
Yes, people can and do release all sorts of things for free. Say, avatars. But who wants to be cybergoth #12342? All of them would look exactly the same. If you want to look unique there are only two things you can do: make it yourself (which is hard unless you're skilled), or get somebody else to make it. And so far we haven't come up with a better way to motivate people to make custom stuff than paying them for it.
Re:Can't the same be said about the stockmarket? (Score:2, Interesting)
If a company is not paying dividends there will still be future cash flows, since every company will eventually either start paying dividends or it will be bought out. Assuming the company is earning a reasonable return on retained earnings (i.e. the market rate), shareholders should theoretically be indifferent whether the company pays dividends now since that cash will be as valuable to them when they get it as it is today.
Banks have to build trust (Score:2, Interesting)
This is not a sign of a pyramid scheme, it's a sign of underdeveloped institutions. It happens in most societies which are first developing banks and stock markets. (Shouldn't a finance writer remember John Law and the Banque Générale?)
Banking institutions develop in roughly three stages.
First there's the banks-disappearing stage (John Law et al), where fabulous returns are promised, but half the time you never see your money again. Europe went through this stage in the early 1700s.
Then there's the Neoclassical stage: Banks build impressive buildings to let people know that they plan to be around for a long time, and to give the impression that they have been around for a long time. This stage arrived in China in the 1920s, when governments weren't stable enough to provide client protection, so banks had to give the impression that they could shoulder the burden all on their own. An impressive building and serious/professional bank managers/tellers help maintain the impression, which is critical if people who got burned in the first stage are going to be convinced to bring their money out from under their mattresses. (Banks built in the 1930s in small-town America have much the same look.)
Finally, there's the government regulation/deposit protection stage. Banks can tuck themselves into the corner beside the Starbucks and the tellers can chew bubble gum, because we know that the government will, most of the time, enforce regulations needed to keep our deposits safe. We don't need the impressive facades anymore, because we trust the institutions.
It sounds like Second Life is still at the first stage. Over time, if the economy continues to develop, expect the Neoclassical stage to develop. Certain players, or groups of players, will build up a reputation for dependability; they will enhance that reputation with professional presentation. Will they build banks with fluted Corinthian columns? Maybe not, but they'll have something equivalent.
This is not a pyramid scheme. This is an apparent arbitrage opportunity that turned out not to be an actual arbitrage opportunity, but, rather, a fairly conservative, boring investment.Re:Can't the same be said about the stockmarket? (Score:3, Interesting)
It's true that the Fed can print money without having extra assets to back it up, thus devaluing it. But as long as people *expect* this to happen, interest rates will be such that by holding your money in a money market account, it will grow and erase this effect, right?
And again, I'm not trying to justify government control of the money supply. I'm just saying: is what you're describing really one of the impacts of fiat currency?
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.
Well, I was saying the Fed, not financial institutions in general, does this. And it does it by having real assets to back the money. If its value falls farther than justified by the Fed's holdings, they can sell assets to restore its price. But the *expectation* that it will do this typcially suffices to prevent excessive inflation.
Moreover, I'm not sure financial institutions care one way or the other. They care about profit. Having more money to lend doesn't necessarily help them; keep in mind they have to pay more interest to depositors.
Finally, if the risk-free interest rate really does persistently stay below the "true" inflation rate, can't that be arbitraged away? Say, someone holds a basket of commodities that are "really" inflating instead of lending it out. That should keep the risk-free rate above inflation, yes yes?
I will agree with you that most of the "problems" with a gold standard are due more to stupid decisions people make while on a gold standard (fixed mortgages with no pre-payment option, anyone?), but I think you could say the same thing about fiat currency!
Re:Deceived by whom? (Score:1, Interesting)