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August 16, 2017

“But the markets don’t always adhere to textbook theories because the humans making the decisions in the markets aren’t always perfectly rational agents operating in a vacuum.” - Ben Carlson

 

When I took my first economic class the teacher insisted that people operated on a rational basis. I immediately thought “not the people I know.”

 

I used to be an avid ‘gamer’ (I really hate that word) and my preferred drug of choice was League of Legends, a multiplayer online battle arena or MOBA for short. The entire business model of that game relied on people making ‘stupid’ decisions.

 

The game is technically “free to play” with the huge caveat that much of the game’s characters are locked. In order to unlock them, players had two choices, on the one hand they could play the free characters (which rotate on a weekly basis) to slowly acquire IP, which could then be used to buy a character, or you could purchase RP and immediately unlock the characters you wanted. There is nothing irrational about wanting to buy RP to play a character you liked because you are essentially saving yourself hours of time. But most of the money being spent on the game was to buy things referred to as skins.

 

These skins had absolutely zero impact on the game and only changed the appearance or theme of your character. And everybody bought skins like crazy (including me!). The price of these skins varied from about 5 to 20 dollars and they sold like hot cakes. There is no logical reason for anyone to buy a skin but they are a lot of emotional reasons to.

 

People bought skins because it feels really good when you have access to something that other people don’t. It’s that central principle that drives successful MMO’s. People wouldn’t invest thousands of hours killing one monster over and over unless it gave them access to something that other people couldn’t attain easily (it’s this forgotten philosophy that is currently killing the MMO market at the moment but I digress) and killing that one monster for all those hours certainly seems irrational to me, yet people persist.

 

Twitch streaming is another example of something that I believe to have an irrational business model. People donate thousands of dollars everyday to individuals who stream themselves playing video games. If you think that sounds ridiculous I would agree with you.

If you were to ask someone who donated 100$ to a stream I bet they would tell you they did it to support the streamer for providing them entertainment. That sounds like a rational answer but it’s bullshit. People donate money to streamers because they like when there name pops up on the stream and having the streamer acknowledge them. That sounds much more irrational but it is a more honest answer in my opinion.

 

What I’ve come to realize is that a successful business exploits our emotions, because well, we are all pretty irrational.

 

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