Financial Analyst Calls Second Life a Pyramid Scheme

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.'"

Comments

Can't the same be said about the stockmarket?

[ArsenneLupin]

... or any other thing that may give money to the lucky?

Re:Can't the same be said about the stockmarket?

[FleshMuppet]

... or any other thing that may give money to the lucky?

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.

Re:Can't the same be said about the stockmarket?

[JeffSh]

The US Dollar isn't based on anything other than trust now - fiat money. What makes second life, or any other currency, any different?

Currency gets its value thanks to simple acceptance.

Re:Can't the same be said about the stockmarket?

[mumblestheclown]

Day traders and the ignorant make the jobs of real investors much more difficult.

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.

Re:Can't the same be said about the stockmarket?

[rlp]

>> Roughly speaking, a Ponzi scheme is one in which the perpetrators make false claims in
>> 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:Can't the same be said about the stockmarket?

[inviolet]

The US Dollar isn't based on anything other than trust now - fiat money. What makes second life, or any other currency, any different?

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?

[FallLine]

So please explain how "pump and dump" (http://it.slashdot.org/article.pl?sid=07/01/21/20 29210) via spam will increase a company's stock value.

Did the spam somehow suddenly increase the value of the company's assets, liabiliies, and income?

Uh, these pump and dump schemes that the spammers orchestrated all targeted OTC/Pink Sheet stocks. In other words, the average price per share was only about 60 cents and the average number of shares traded in a day was only about 2K-3K. In other words, in a given day only about $1800 was trading hands with these stocks. All these spammers need to do is convince a very small number of unsophisticated people, a couple dozen tops or just %.001 of their spam recipients, to drive the stock price up. They could never work these in more expensive and non-thinly traded stocks. Similar scams are conducted all the time with physical goods and services as well.

Look at Enron. The day before the scandal happened the stock value was high. Not much after, it was worth less than a dollar. Did the actual value of the company's assets change in that short period? If the later price is "correct" then why was the price so high for so long? If the former price, then why did it drop so much?

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.

The financial markets, for all their high-paid analysts and smart people, are really fickle, ruled by the whim and fancy of investors and by herd mentality.

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.

One born every minute...

[Zeek40]

I'm sorry, buy if you consider investing in virtual property in a Video Game a good idea, you have absolutely no business managing your own funds. You'd probably be better off investing in a pyramid scheme ( aside from the fact that they're illegal ). At least most pyramid schemes have some sort of actual product that moves around, rather than just a collection of bits on some hard drive somewhere.

Probably more like Vegas than pushy realitors

[antifoidulus]

Some will go in desperately believing that it will make them a lot of money then wind up losing a ton, some will be smart and/or lucky and go in and make a lot of money, and most will go in with the expecation that they will enjoy themselves, if they make some money great, if they lose it it sucks but they know that going in and set aside a small amount for that purpose. And of course, the house, aka Linden Labs, always winds up a winner.

Deceived by whom?

[Rob T Firefly]

I've only recently started playing this game, and me getting into it had nothing to do with any hype about perceived money-making opportunities. I had seen some friends playing, and seen some screenshots and things, and was mildly interested. When the client went OSS I respected that move enough to dissolve my last bit of resistance and try it out myself, and it turns out I enjoy it so far.

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:Deceived by whom?

[cowscows]

Exactly. There are some people who've had the mixture of talent, time, and luck with SL, and have managed to make some money through the game. For many of those people, as their SL bank account grew, so did their ego. And so they make a big deal about themselves, it gets picked up by some of the media because it's kind of a strange story, and some lazy people with free time think they can maybe get in on that action.

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.

Load of junk

[Anonymous Coward]

I make $1500 US a month from Second Life, whilst the ease of making money is definately overstated it has nothing in common with a pyramid scheme and it is very easy to withdraw your money (Not so much if you are trying to withdraw less than $50 due to the fees involved). This article talks about "banks", which no real business should be touching as the are run by residents and are unofficial and unapproved. This is the equivalent of giving your gold to another player in World Of Warcraft who tries to make you interest off it through loaning it to other players.

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:Load of junk

[roman_mir]

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.

Re:Now on computers!

[udderly]

"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" Just like the lottery.

SL economy is not a traditional economy

[bitkari]

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:

• Apart from land (the price of which is set by Linden Labs), there is no real scarcity. If I want something (anything!), I can make it myself.
• In the world you have no needs. You don't need any food to eat, you don't even need a place to live.
• While it is described as a "game", there is no real game in SL. As such there is no struggle to gain resources to achieve game success.

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.

Poor Judgement costs money

[DLG]

I have had a second life account for over a year. I have some typical number of Lindon dollars. I have never bought more. I have never spent any. I have no real understanding of the economy, except that if I want to import a graphic image into the system it costs money, so I don't.

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)...

-----

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.

-----

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.

------

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.

Other Pyramid Schemes

[Skevin]

Real Estate must be a pyramid scheme because every time land changes hands, it's usually because the previous owner is selling it for more than he bought it for, never mind when each owner has developed the property some more.

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....

[jidar]

Ah. Blaming the victim.
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?