“Teaching Economics in Second Life”

Kevin A. McCabe*, Stephen Saletta, Gavin EkinsProfessor of Economics, Law, and NeuroscienceGeorge Mason Universitykmccabe@gmu.edu

CSNTHE CENTER FOR THE STUDY OF

NEUROECONOMICSAT GEORGE MASON UNIVERSITY

CSN Why Second Life?

• Second Life is Creating Wealth – Adam Smith– Server space (land), virtual meeting space,

programming and graphics (goods and services)

• There is a circular flow of both money (lindens) and goods and services– How much is difficult to determine without

appropriate macro accounting data.– But all the micro data is there at the transaction level

and this could in principal lead to novel practices and an interesting study of the micro-foundations of macro.

CSN Why Second Life?

CSN Why Second Life? (continued)

• Second Life has many of the same concerns as any other state– How to manage the money supply.– How to attract capital and keep it in the economy.– How to maintain an import/export balance.– How to provide public goods and services.

• Second life can be explored on your desktop– The economy comes to you.

CSN Why Second Life (continued)

• It’s the Wild-Wild West – Problems, but also opportunities.– What should rule of law look like in Second Life?– How should governance structures work in second

life? Identity, Reputation, and Taxes.– Is Linden Labs a benevolent dictator? Or are they a

real life firm with profit making motives? From the viewpoint of economics do we treat them as a force of nature, the government, or as a service firm in First Life that operates Second Life for their own purpose?

CSN Our Strategy for Second Life

• Buy an Island – Terraeconomicus (150, 85, 57) • Learn how to write scripts, add content, and run

some experiments.

CSN Our Strategy for Second Life

• Buy an Island – Terraeconomicus (150, 85, 57) • Learn how to write scripts, add content, and run some

experiments.• Build a Second Life Learning Laboratory in

First Life (tried once – no success yet)• Design and deliver a programming course in Second

Life. (Build Human Capital)• Design and deliver a content driven economics course

with demonstration experiments in Second Life. (Standard Course Approach)

• Turn Terraeconomicus into a distance learning experience with classes meeting on the island and students able to get GMU credit for study on the island.

CSNThe Bank of Sweden Prize in

Economic Sciences in Memory of Alfred Nobel 2002

"for having established laboratory experiments as a tool in empirical economic analysis…”

Vernon Smith

Allegra 3T Scanner

Top View

Front View

Behavioral Lab

CSN Krasnow LaboratoriesImaging Lab

CSN Inducing Subject Incentives

Buyer 1

Unit Value Price Earnings1 $92 $63 $3

Total Earnings:

Value indicate the dollar resale for each unit paidby the experimenter.

Price is the dollar amount the buyer pays the seller.

CSN Inducing Subject Incentives

Buyer 1

Unit Value Price Earnings1 $9 $4 $52 $6 $5 $13 $3

Total Earnings: $6

In this case the buyerwould be paid $6.

Earnings is the net dollar earnings of the subject.

CSN Inducing Subject Incentives

Seller 1

Unit Price Cost Earnings1 $12 $43 $7

Total Earnings:

Price is the dollar amount the buyer pays the seller.

Cost indicate the dollar price for each unit the sellerpays the experimenter.

CSN Inducing Subject Incentives

Seller 1

Unit Price Cost Earnings1 $4 $1 $32 $5 $4 $13 $7

Total Earnings: $4

In this case the sellerwould be paid $4.

Earnings is the net dollar earnings of the subject.

CSN Inducing Subject Incentives

Buyer 1

Unit Value Price Earnings1 $9 $4 $52 $6 $5 $13 $3

Total Earnings: $6

Seller 1

Unit Price Cost Earnings1 $4 $1 $32 $5 $4 $13 $7

Total Earnings: $4

The difference between the buyers value and the sellers cost isthe surplus from the trade. The experimenter pays the surplus.

CSN B1 and S1 on Supply and Demand

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Other Buyers and Sellers

CSN

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Competitive Equilibrium

CSN The Double Auction Institution

(1) Message space: Bid, Ask, Buy, Sell.

(2) Message sending rules: Buyers Bid & Buy;Sellers Ask & Sell; Improvement Rule;Starting and Stopping rules.

(4) Production rules: Buy or Sell: results inBuyer sending Seller cash and Sellersending Buyer a unit.

(3) Message processing rules: Update book; Determine standing bid and ask.

CSN The Double Auction Book

ID Bid Ask ID

B2 $3

CSN The Improvement Rule

ID Bid Ask ID

B2 $3

$7 S3

$6 S1

Improvem

ent Rule

CSNID Bid Ask ID

B1 $3

$7 S3

$6 S1

Improvem

ent Rule

B1 $4

More Improvement

CSN The Bid-Ask Spread

ID Bid Ask ID

B1 $3

$7 S3

$6 S1

B1 $4

CSN Contract

ID Bid Ask ID

B1 $3

$7 S3

$6 S1

B1 $4

Sell S1

CSN Contract between B1 and S1

ID Bid Ask ID

B1 $3

$7 S3

$6 S1

B1 $4

Sell S1

CSNID Bid Ask ID

B1 $3

$7 S3

$6 S1

B1 $4

Sell S1

Price = $4

Contract between B1 and S1 at $4

CSN What we see in the real world

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ID Bid Ask ID

B1 $3

$7 S3

$6 S1B1 $4

Sell S1

The Book (maybe) Contracts

CSN What the experimenter sees

Environment:(values/costs)

Messages

Outcomes(contracts)

Governance

Institution:DA

Feedback Production

ID BID ASK ID

B1 $3$7 S3

$6 S1B1 $4

Sell S1

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D1 2 3 4 5

CSN What the experimenter can do

(1) Replicate an experiment by inducing the same values and costs and using the sameinstitution.

(2) See how changing the rules affects themessages that are sent.

(4) Measure performance such as economic efficiency.

(3) See how changing the value/costenvironment affects messages.

CSN Pilot education project

Center for Neuroeconomics, George Mason University

Cognitive Neuroscience Section, National Institute of Neurological Disorder and Stroke

1Lt, USAFR, Office of the Assistant Secretary of the Air Force (Acquisition Integration)

Steve Saletta

CSN Overview

Existing efforts in Second Life•Research

Conduct “macro-level” economics experiments

•EducationDeliver undergraduate level course content to students.

CSN Overview

Benefits to Research•All transactions/interactions take place through the computer

Minimizes error in recording

•Large Simultaneous User basePermits multi-subject experiments (20-30 people, real-time)

People will do anything for a buck (linden)

CSN Overview

Benefits to Education

•Rich 3-D environment

•“Experiential” learning

•Enables persistent individual lessons or simultaneous interactionwith students/instructor

CSNGoals

•Undergraduate (100 level) economics course taught 50% in second life, 50% in the classroom

•Develop “modules” supporting lessons to accompany lessons from traditional textbook

•Online evaluation of learningQuiz automatically emails responses to instructor

Hybrid traditional/online course

CSN Test Module

Goals

•Proof of concept module to explore/demonstrate capabilities

•Using in-house talent to baseline development costs

•Long term goal of attracting support for further development

CSN Steve Saletta

CSN Test module

Ice Cream Truck

•Students drive a truck through several neighborhoods

•Set price

•Receive feedback on quantity of cones sold

•Display’s the decisions of the student on a traditionaldemand curve

CSN Steve Saletta

CSN Steve Saletta

CSN Procurement

Our costs

•Approx. 80-100 hours from ground zero to limited functionality

•PhD Economics grad student programmers with VisualBasic/Java experience, but no graphic-design or 3-D modeling experience

Other approaches

•Contracting to other second life residents

Successfully used by NOAA

CSN Steve Saletta

CSN Challenges/Issues

•Need ongoing in-house talent or support contractor

•Relatively steep learning curve compared to traditionalweb-based content delivery mechanisms

•All IP/Content is stored on servers owned by Linden LabsDeveloped content cannot function in the absence of servers

CSN Gavin Ekins

Thank YouCSN