Theory Meets Practice Online

Researchers and academics are looking to online worlds such as Second Life to shed new light on old economic questions

For those who think that online worlds created in venues such as Second Life and online games such as World of Warcraft are just fun and games, think again. Business school professors and economics researchers are turning to these virtual worlds as dynamic laboratories to shed light on some of the venerable mysteries of economic behavior.

As proof, all you needed was to crowd into a packed conference room in Second Life earlier this month for a panel discussion on the evolution of stock exchanges, the role of regulation, and other issues facing this new economy. The panel was hosted by Cornell B-school professor Robert Bloomfield, whose real-world specialty is using lab experiments and mathematical models to study the effects of financial market regulation on investor welfare and how psychological forces affect financial markets.

Running Complex Experiments Online

"There are futurists who believe that Second Life or some other virtual world will be the future of the Web," says Bloomfield, who inhabits Second Life through an avatar aptly named Beyers Sellers. "My goal is to use virtual worlds as a way to teach students about real-world business."

In fact, many economics researchers, including Bloomfield, professor of accounting at Cornell's Johnson Graduate School of Management, are using the virtual environment to test ideas involving staples of economics such as game theory, the effects of regulation, and issues involving money. Since 1989, Bloomfield has been running experiments in the lab in which he creates small game economies to study narrow issues. But when the Financial Accounting Standards Board recently approached Bloomfield about studying how to create financial accounting standards that will assist investors as much as possible, he quickly turned to the virtual world for answers.

"It would be very difficult to look at the complex issues that FASB is trying to address with eight people in a laboratory playing a very simple economic game," he says. "I started looking for how I could create a more realistic economy with more players dealing with a high degree of complexity. It didn't take me long to realize that people in virtual worlds are already doing just that."

A Lab for Regulatory Policy

Bloomfield points out that today's virtual economies are very much like the U.S. economy about 100 years ago, when there was no regulation whatsoever. That makes this other realm ripe for study. "Virtual worlds like Second Life give students an opportunity to understand what the purpose of regulation is, why it arises, what forces drive it to look ultimately the way it does," says Bloomfield.

At Indiana University, researcher Edward Castronova has posed the idea of creating multiple virtual economies to study the effects of different regulatory policies. At Indiana, Castronova is director of the Synthethic Worlds Initiative, a research center to study virtual worlds. "The opportunity is to conduct controlled research experiments at the level of all society, something social scientists have never been able to do before," the center's Web site notes (see, 5/1/06, "Virtual World, Virtual Economies").

A virtual stock market is certainly not the only online entity that opens itself up to research. Marketers are already using the virtual world to test campaigns, packaging, and consumer satisfaction. Pepsi (PEP) famously tracks use of its products in Architects seek reaction to design. Starwood Hotels (HOT) test-marketed its new loft designs in Second Life (see, 8/23/06, "Starwood Hotels Explore Second Life First").

Market Research

Avatars also need a place to live, so the virtual worlds offer insight into real estate trends.

What do dream homes look like? What neighborhoods are most appealing? Is it a buyer's or seller's market? What's the best way to stage a home? The questions researchers could ask are endless. Carmakers also have used the virtual world to show off new interiors and other, add-on features. And B-school professors have suggested that virtual worlds can serve as incubators for real-world enterprises.

Discussions about the direction and utility of online economies are heated. For instance, regarding online stock markets, serious Second Lifers are not easily convinced that rules are the answer. At this month's panel discussion, avatar Arbitrage Wise, CEO of the proposed Second Life Capital Exchange, said he's a firm believer in the markets and wants few regulations in his exchange. Meanwhile, avatar TraderJohn Susa, the chairman of the Second Life Exchange Commission, a group intending to regulate exchanges and facilitate self-regulation, says that while the virtual exchanges are pretty good at policing themselves, he hopes people realize that rules are necessary for a positive future. "Second Life is only four years old," Susa said. "There are a lot of things happening and lots of growth yet to come."

B-schools are starting to catch on to the possibilities of the virtual world (see, 4/16/07, "I Was a Second Life B-School Student") Bloomfield sees potential and is spending his summer vacation organizing what he calls Worlds for Study, a project he initiated that will bring together professors and tech experts to develop a virtual world platform just for teaching and researching business. A paper he recently wrote on the subject garnered interest from the academic community and has been downloaded from the Social Science Research Network (SSRN) hundreds of times, says Bloomfield.

If the futurists cited by Bloomfield are correct, virtual worlds will dominate the Web in coming years and virtual realities will seep into actual realities. The Second Life currrency—Linden Dollars—will be converted to real dollars. And everyone will want to learn from this so-called game.

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