Greedy Goblin

Thursday, March 1, 2012

Lemonade or loan

Boxington commented to the RMAH buying: "To me, a real life analog of this situation is person A who starts a lemonade stand to get capital to start a lawn mowing service to get capital to fund ever bigger and more capital intensive enterprises (the key being they ground their way up from nothing). Person B, conversely, takes out a big loan and skips the first 5 steps of grinding to move into a small/medium sized business. Who is more rational, A or B? It's unclear unless you define carefully your definitions, but in no way is it obvious that person B is somehow skill-less, lazy or cheating. In this comparison, person B is the plex to isk converter. One might argue that they skipped the grinding part of the game (going from frigs to destroyers to cruisers, on up) and that is somehow skill-less or cheating, but that would, again, require much more specification on how we ought to play the game (and that will probably be fruitless)."

At first I couldn't answer it, but life answered it. I set up a business plan in EVE. I don't discuss it in detail until it actually works. The product of the plan sell well. I calculated the material prices and saw that they sell cheaper than the product. I figured out that I buy up those which are 10% cheaper than the break-even point, create the product and sell. So I went and start buying it. Then bang, "you can't afford it" or something. I managed to blow all my 150M ISK that is not invested into something already to raw materials. Nevermind, I create the products, sell them and I made 15M. Except, the materials are littering a whole region (I ran out of money before I finished buying in The Citadel), and they are big in size, needing lot of runs with my poor Badger II.

The money is not lost, it's in raw materials and I may even make money by holding them if their price continue to rise. Or I lose if they don't. However I did not plan to invest into them, did not research their future price and to prevent being out of cash I had to sell some books I bought for myself for future learning.

What a moron! What made me do so stupid act? I did not do anything stupid like on the first week when I went from zero to 50M by hauling, mostly rich plagioclase and pyerite. What happened?

The money these good souls gave me conspicuously match to the money "I did not have invested elsewhere". I grown naturally before. I got a small amount in one business and invested into the next. I probably made stupid things but always with little since I did not have more, as the rest were invested into something that proven itself to work, even if with lower profitability than new plan (if works). I had to try my plans out in small and fix the errors. Just because the plan is good, it doesn't mean that it's without "little" technical mistakes. My plan with the production still doesn't look bad, I was just unprepared with the logistics of it. As you naturally grow, you fix these mistakes, polish your plan. You always know where to spend the next batch of profit.

However if you get money from nothing, you put it into something that is not ready yet. You are over your head and will make the necessary mistakes on much larger scale than you should. You must start out at a lemonade stand because when (and not if) you lose a bottle of lemon juice, it will be much easier to stand up than after losing $1M investor money. This is exactly what happened with the .com business around 2000. The internet-based business, the web2 ideas weren't bad. These companies weren't scams or daydreaming idiocies. Yet they went down with lot of investors money, because the people inside did not know how to handle a company of that size. They should have started out small.

If you buy a PLEX in the item shop to have a "fast start", you probably going to waste it some stupid way and chances are that you won't be significantly ahead of those who did not do it. For the same reason I'm sure that financial investment (buying papers without being proficient on the field of the company, just because I my crystal ball told that they'll rise) will cause more bankruptcies and recessions. It gives money to people who can't handle it yet. If they could, they would have it at the first place!

PS: after two weeks of playing my balance:
Liquid: 391M
Buy order escrow: 111M
Sell order worth: 25M (They will sell for that amount, I did not price them high)
Materials waiting for processing: 43M (on current, unprocessed price)
Books, implants that I use myself and won't sell: 87M
Gifts from other players: 400M

So the wealth collected by me is 257M. Considering that a PLEX costs 500M and covers 4 weeks, I'm already making enough to play free. Of course I can't yet as I will invest this money to ships and skills to increase my revenue, but the point is that a totally fresh newbie can trade himself into free-play mode.


Tivadar said...

Both ways can provide you experience you can use later.The only thing that changes is the scale of the mistakes you are able to do as you already saying in the post.Also that means that risk-reward is greater.

So with a loan you can and most probably will make big mistakes that will make you risk the original investment and leave you helpless in debt.The start small way doesnt have that risk because you dont have anything to lose while accumulating experience.

I believe that both ways are viable.Each one's success just depends on the person that uses them.

Anonymous said...

But does it matter? Eve is the only game I know that the size of you ISK wallet has no influence on that a newbie capsuleer can do. Did I buy a plex? Yes. I did it so I don't have to worry about ISK. There is no way I can spend the ISK to make myself better in Eve. It is impossible because I don't have the skills to fly big, shiny ships. But I can buy 100 frigates and have A LOT of fun in null/low sec.

Azuriel said...

These companies weren't scams or daydreaming idiocies.

Yes, most of them were. The business model was that they would not be selling anything, but rather buying up advertising to eventually get large enough to sell something later. In some cases it worked, like with Google and eBay and Amazon, etc. In the vast majority of other cases it failed miserably.

And the irony in all this is that none of those companies would have made it the lemonade way. Can you start a lemonade-sized search engine these days? Of course not.

Should a brand new player drop $1000 in EVE and fly the newbie zones in a Titan? Of course not. But if a person is already savvy enough to know not to blow his entire liquid assets on a 10% time-intensive return, there is no reason to start small if he doesn't have to.

You probably borrow money for a car to get you to a job that makes you more than enough to offset the interest payments, right? It is the same principal here.

Caramael said...

The largest part of the US tech industry is backed by venture capital, and it seems very successful. How would you explain that?

I bought two PLEX (better deal than 1) to buy me a proper level 4 mission ship and fit. I already had the knowledge, skills and standings, and I didn't want to grind level 2's and 3's to get the required amount of ISK to buy the assets required to do level 4's.
And now I'm making more than enough ISK to buy back both PLEX and use them to pay for two months of subscription.

Shalcker said...

Azuriel, how about DuckDuckGo? Certainly looks like "lemonade way in search engines" to me, so "of course not" is not warranted. Obviously, "survival bias" and all, but there are many ways things can work, not all of them big, even now.

Anonymous said...

Personally, i was thinking at throwing a pair of billions your way.
I thought it'd water down your experience, though.
If you want some ISK for a specific project which you can't afford, feel free to ask me on AureoBroker - joint ventures can be pretty good.

Sega said...

That's exactly why I made it 100mil. Enough for the statement, not enough to influence the experience too much.

EvE can be 'real money cheated' though, convert PLEX to ISK and use it to buy a characted on the Bazaar. All perfectly legal.

Anonymous said...

@Caramael "The largest part of the US tech industry is backed by venture capital, and it seems very successful. How would you explain that?"

Capitalism has the good old darwinistic "survival of the fittest" engine at his core. You notice only the survivors because they are still around. The corpses of those who failed get scavenged very soon.

In the US Tech industry you notice only the successful companies. The countless startups which are born and die in a blink tend to fall under the radar.

This doesn't make the industry not successful: this darwinistic side of capitalism allows for many different ideas and approaches to be put to the test. What works goes on, what doesn't work is food for the scavengers.

Eaten by a Grue said...

But Gevlon, just because those who buy PLEX might make larger mistakes with their business does not mean they will not learn from them, just like you are. Sure, they might lose a PLEX or two initially, but then they figure out where they went wrong, and their next PLEX would be invested more wisely.

You also ignore those players who care nothing for trading and only care for battle. There is zero experience for them to gain in the business side, because they want nothing to do with that side. They want to blow up ships.

Steel H. said...

Confirming that having more money than brains is bad, mmkay? It can do bad things to you, like this:

Rohan said...

Part of the issue is that with the way Eve is set up, you're only a newbie once, as you generally only have a single character.

So when you could use the monetary boost of a venture capital, you don't have the knowledge necessary to make full use of it.

However, when you've acquired the knowledge necessary to use the venture capital successfully, you've probably also acquired enough ISK so you don't actually need to obtain more.

Goodmongo said...

Did that 400M in gifts help? Does every new player get 400M in gifts? Then I don't think your statement that every new player can get to play for free fits.

Gevlon said...

@Goodmongo: I made 256M on the top of the gifts.

chewy said...

The ".com" comparison doesn't work for the reasons that Azuriel has stated. At the time (and yes, I was there) no one had the slightest notion what was a crazy idea and what would make a lot of money, but either way it doesn't make a good analogy for what your discussing, they didn't fail because of a lack of business experience.

Boxington said...

Boxington here:

Two responses to Gevelon’s excellent post today. First, my main point was that one would need to further specify why the Plex->Isk conversion was not desirable, and Gevlon provided that by saying it would correlate with making stupid investment decisions because it was more capital than the player had the skill to invest properly. While others in this comment thread suggested that is not a legitimate rationale, Gevlon has now provided a testable/falsifiable assertion, and so makes Gevlon’s statement both cogent and interesting.

Secondly, my take on if Gevlon’s assumption is a good one or not is that it depends on whether the “risk is properly priced.” Risk analysis, and the identification of risk premia, is a huge topic in economics and debatably related to the origin of the great recession. Gevlon’s statement that the plex->isk converter is likely going to make a stupid investment, if we convert it to traditional economic terms, is basically saying that the Risk Premium associated with giving a large venture capital investment to a new player is too large to justify the investment (i.e. the venture capital would be better invested in someone with a lower risk premium, even if they had a lower average expected ROI).

But the catch to all of this in the plex->isk case is that the venture capital investor is the same player as the user of the investment. This makes analysis somewhat complex because now the supply and demand of credit collapse into one firm’s decision process. But in other ways, it makes it simplified, because now the utility maximizing rule becomes simply “Invest in project A if the risk adjusted, discounted value of the ROI on A is less than the opportunity cost of BOTH the investments’ next best use AND the opportunity cost of what the player could have done with the time it would take to generate a similar sized sum of capital with the next most profitable venture.” That’s a mouthful, but it summarizes to the dictum: “You are rational to convert plex->isk if your ability to earn Dollars/Euros is greater than your ability to earn ISK directly once risk and discount rate (the time preferences of “I want it now”) have been properly accounted for.” Gevlon is basically saying that the risk premium is too high and that a person would not be rational to convert IRL currency to ISK, but again, this is a testable/falsifiable statement, and it would dramatically depend on what the IRL income of the player is.

Throughout this analysis, though, is the assumption that we do not lose utility directly from the conversion of IRL currency to In-Game currency. That assumption doesn’t hold for me personally, why is why I have never actually bought a plex. It would ruin the game for me, but this has nothing to do with the traditional economic analysis of risk, and is just a violation of the assumption of rationality an economist typically makes (excluding behavioral economists etc.).