Saturday, September 16, 2006

New Math - Three Weeks In

The "new math" in Blogshares was put in place in late August to drive out the demon of a hyperinflated ideas market. Two trends, driven by the algorithm controlling the ideas market, had caused 98% of the wealth in the game to migrate to ideas. The reasoning was simple - guaranteed returns of 1-2% a day, as shown on the chart below.

The new math was introduced with two factors, D1 and D2, to put downward pressure on the ideas market. D1 - the proportion of total player wealth tied up in ideas - works on the market as a whole, while D2 works on the individual industries.

Initially, the new math did a phenomenal job, deflating the ideas market by at least B$ 110 trillion (27%) in the first week. As you can see on the graph below, the fall was swift, and quite painful for some players who had not protected their portfolios. With D1 above 0.65, the general downward force clearly dominated the market.

But then, on the 29th, it looks like something happened. The fall abruptly stopped, as if someone had flipped a switch. Total player wealth started to grow, so the downward pressure continued, but it only held things level. Could 0.65 in D1 be a key turning point to watch in the future?

In the next graph, you can see another inflection point on September 2nd, when the idea market started to rise. It hasn't looked back since, and we now have an ideas market that is B$ 50 trillion larger than it was on the 23rd of August. The downward force, at this point, appears to be just along for the ride, as the upward forces generated by players indexing rare industries rule the day.

Under the old math, industries rose or fell linearly, based on the rarity of their ideas. It was clear from their price histories which would rise, which would fall, and which would remain flat. Now, industries rise and fall based on the actions taken in the market. The Activism industry is a prime example:

In all, I think these changes are good for the game, and will probably help improve the index on which the game is based. Industries will be refreshed by players in search of bargains, and players with small stakes will have the opportunity to grow them by making the right trades.

The only question remaining is how far this will go. As seen in the graph below, the rate of growth in the ideas market is accelerating, well beyond the 1-2% levels under the old algorithm.

Will the game administrators allow it to get out of hand, or will some additional market corrections get applied in the future? The only way to find out is to play the game.

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