Market turmoil: Design style

I poked my head out of my badger hole Thursday and discovered the worst week in the Dow Jones history.  I’ve spent the whole weekend researching and thinking and not panicking and trying to decide what to do.

First, of course, the disclaimer – I’m not an economist, I’ve never taken an economics course, and I’m not an expert.  In fact, I heartily endorse you not listening to me and listen to someone else instead.  But I’m a game designer, and I balance systems and player psychology, so of course I have to take a pass at the financial crisis.

Here’s what I’ve learned after reading too much:

  • Something in the system was really really rotten.  Unbalanced, broken, divergently manipulatively rotten.  My gut says the issue was actually bad money in politics.  Most of the crash comes from a few laws that were passed a while ago, coming from unaccountable close political ties to businesses that would otherwise have been regulated.  Fixing this corruption will go a long way to preventing this from happening again.  Not that anyone cares about that right now.  Likewise, these business weren’t incentivized for the long term by their shareholders, most of which don’t have a meaningful vote, and so the businesses were only really representing short-term greed.   I want my shareholder vote back!
  • People are scared.  This has two effects:  businesses are scared because they don’t trust each other, and citizens are scared because they don’t trust the market.  This fear has led to credit and stock contractions that are largely out of proportion with their actual value.  Things are not as bad as the news suggests.
  • Things are not as bad as our stock has come to suggest.  There have been lots of crashes since the 1930s, and we’ve gotten a lot better at handling them.  Case in point, look at the Europeans actions this weekend, banking on knowledge about the Swiss crash.  Plus, everyone recognizes that many stocks are way undervalued at this point, relative to their yearly earnings and assets.  As they say, the fundamentals of the economy are sound.  See fear, above.
  • The only really bad thing that could drive stocks to the 1970 or even 1930 levels that people are worrying about the Federal Treasury goes under.  All the bad news we’re hearing – banks in trouble, wheat unsellable, prices plunging, states not able to get loans – is small potatoes compared to a government.  The Federal Government is and will underwrite the bank issues.  The question is whether it can afford to.  Given the size of the banking industry, it looks like it can, as long as we don’t let it go much further.

Now, this isn’t to suggest that some people shouldn’t be scared.  If you’re overleveraged, or you were taking on more risk then you were comfortable with, then this is not a good time.  But from a system’s analysis point of view, there is hope.

It reminds me of the Glock Bomb, described recently in Game Developer by Soren Johnson.  Counter-strike tried a floating economy to price its weapons, but as the meta-game optimized, the “best” weapons were quickly driven to expensive highs, while marginally okay weapons went unpurchased and ended up at $1.  The Glock went “bankrupt”, and started getting used for all sorts of exploits.  Soren makes the point to show that free markets in games are dangerous.  With game economy balancing, just like market balancing, some of the emergent behavior can be unexpected.  But looking at the data you can see exactly what went wrong, debug, think about it, tune, and try your system again.  Use your industry instincts, and avoid the fear that’s punishing the markets.

Of course, this could all just be everyone’s realized Pokémon cards are dumb.

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