The Most Dangerous Game
For about seven months now, I've been participating pretty directly in a very old massively multiplayer online game. It's insanely PvP, with gank-fests exceeding that of the early days of Ultima Online. It's unbelievably harsh to newbies, sporting a rule system that sounds easy but actually has a learning curve that resembles Mount Everest. It is also very addictive and has received more marketing budget than World of Warcraft has ever dreamed of.

Clients are offered by multiple vendors, and while many offer a free version of the game for you to play with at no risk, the "premium" version is where the action is at. Top players of the premium version actually make money at the game. Lots of money. I've spent more on it than I think I ever spent on EverQuest the whole five years I played it.

It's called "options trading."

It's been added to a long list of obsessive interests in my life. Like I needed more.

My mother actually got me hooked on it, as she's been trading options off-and-on for years. I was watching money I had in professionally managed mutual funds lose a ton of value in the course of a single month, and I said, "Gee, I could lose that much money in a month all by myself, without paying professionals to do it for me!"

I'm happy to note that while I've lost money at it (most of it in a disastrous, over-zealous third month - lately I've been holding my own pretty well), percentage-wise I'm actually doing a lot better than my professionally-managed IRA accounts. The best part of it has been being able to make serious money as the market tanks. Not as much as my IRAs have been losing, unfortunately, but it has been kinda fun to ride Lehman Brothers down for a couple of months in a "bearish" position and make 20% - 30% profit on it in only a couple of weeks.

Options are basically contracts with expiration dates against equities (stocks, funds, etc). For example, a call option on a stock gives you the right to buy 100 shares of stock from someone at a particular price within a certain time frame. If the market price of the stock never goes that high, the contract will expire worthless - after all, you wouldn't want to pay MORE than the going market price for something, would you? But if you have a contract to buy a stock at $50, and it goes up to $60, you could exercise the contract, buy 100 shares for a total of $5000, and then sell them immediately at market price for $6000, making $1000 in the process. Pretty nice, especially if that contract only cost you $300 to begin with. More often, you don't even "exercise" that option, you just sell it to somebody else. Hey, if it's already worth $1000, you should be able to get more than $1000 out of it. Plus a little more for however much time is left on the option (because, you know, it COULD go higher...)

It even goes in the opposite direction with "put options," which go up in value as the stock goes down in price. There are a tons of different strategies to play using combinations of buying or selling calls or puts (and stock) at different strike prices and dates, to make money whether the market (or underlying equity) is going up, down, or sideways.

If it sounds like a simple way to make scads of money - it's not. As it turns out, the old adages like "buy low, sell high" or "cut your losses and let your profits run" - while completely true - are about as useful as Charles' ski coaching to Lane in the movie Better Off Dead: "Go that way, really fast. If something gets in your way, turn!" It's a zero-sum game (well, less than zero-sum, actually, as you lose a small amount of money with every transaction due to transaction charges and what's called "slippage") where new players are immediately challenging some of the best players in the world who live, eat, drink, and sleep this stuff.

As a gamer, and a game designer, I have found the whole structure fascinating.

One of the points frequently made is that it seems to be human nature (or at least a western cultural tendency) to take profits early, and let their losses run. Pretty much the opposite of the correct trading strategy. We quit while we're ahead, and we stick it out to the bitter end. Maybe it's because we hate to admit failure, or hate to admit that we are wrong.

I don't know how applicable this is in a game, because a lot of this is rooted in emotional decisions that aren't usually present when playing a game. However, I do recall a few unsuccessful raids in EverQuest back in the day where we launched successively LESS organized attacks on a boss as the night grew late - throwing away more and more experience points in a desperate bid to make the night worthwhile and salvage some value for our efforts.

The other thing that was of great interest to me is how incredibly diverse the different strategies are. You've got a market that has significant random (or seemingly random) and psychological aspects, even some out-and-out manipulation, on top of extremely complex fundamentals (which matter less in day-to-day price changes than the other factors, IMO). And you've got an amazing diversity of strategies for playing it successfully. This wide variety of successful strategies (not to mention several orders of magnitude of varieties of unsuccessful ones) - some of which seem contradictory - comes from relatively simple game rules.

It's like an iterative Prisoner's Dilemma on steroids played with hundreds of thousands of players every day.

There are a few common elements. Unlike about every other game I've ever played, most of the successful strategies actually center around losing well. It's a combination of really boring money management and risk management techniques coupled with lots of discipline, but the central point is "you gotta know when to hold 'em, know when to fold 'em." And some of the most successful players lose more often than they win. They just know how to lose small.

Since I've been overhauling the combat system a bit (well, on paper so far) for Frayed Knights, this has led me to thinking about parallels between this and repetitive, resource-based gameplay like RPG combat. Old-school RPGs had more of this element, as you were constantly considering how many resources you'd commit to any particular fight. Did you really want to blow all that mana on a fireball right now? How about shooting (and losing) those magic arrows that cost a platinum coin each in fight where the monster is unlikely to have more than a few silver coins of loot? They are cheaper than a resurrection spell...

This could really be expanded upon and given a lot more flexibility. But I'm not sure how to do this without making the user interface even more complex and arcane than it is now...

Trading options been a wild game. It is surprisingly easy to learn once I dug into it, but brutally difficult to master - especially trying to do so during one of the most crazy economic eras since the Great Depression (everybody loves saying that, so I guess I will, too). But it appeals to a part of my brain that used to obsess over programming AI to play the game of Go.

And as you can tell from me comparing the stock market to RPG combats, it has warped my brain something fierce. Pity me.


(Vaguely) related wastes of electrons:
* Can Playing RPGs Make You Rich?
* Is DRM Killing PC Gaming?
* The Backwards MMORPG Experience
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Labels: Biz, Game Design

- posted by The Rampant Coyote @ 7:35 AM (Permalink)