E35: In Defense of Loot Boxes (w/Dr. Matthew McCaffrey)

Loot boxes have all the markings of a moral panic. Dr.McCaffrey reviewed the emerging literature, and like the research on video game violence, it's destined for methodological malfunction.

We discuss why everything isn't a loot box, the apathetic interest of economists in games, what George R.R. Martin's economic equilibrium teaches us, and how to get more people interested in economics.

Follow Dr.McCaffrey on Twitter [1], see him on video games [2], and read his loot box and A Song of Fire and Ice papers here [3].

Transcript

Phillip Black: 0:00

Do you think the Austrians are more active on social media? Like, I feel like there's just a lot of prominent Austrian Twitter accounts.

Matt McCaffrey: 0:07

I would, I would say yes, because I think they have a greater interest than most economists and. getting a sort of a public hearing and drawing attention to the kind of work they do and that sort of stuff. I mean, I think most, most economists, the type of work they do is interesting to economists and that's pretty much it.

Phillip Black: 0:26

Shots already fired. I

Chris K-S: 0:28

no, no. I, it's incentives, right? The Austrians are, are a bunch of nobodies and they don't need the neoclassicalists don't need the platform. The Austrians need the platform. So they're incentivized to post. That's my, that's my hot take.

Phillip Black: 1:02

Do you think it's fundraising? Like, is that, is that the incentive they're responding to?

Chris K-S: 1:05

Yeah, I mean, if you don't have a platform, it's kind of like I used to post a lot on LinkedIn. I used to get like, when I first was kind of getting into the industry, I was a lot more public and now that I'm kind of established, I just don't really, I post what I want to, I post what I think is going to be interesting, but I don't I'm not a consultant like you, Phil, so I don't really have like this reputation to uphold. So yeah, I don't know. I guess that would be my example, you know, my personal example. Like, they have more to prove. Neoclassicalists have been in the White House for the last, you know, 100 years or whatever. They don't need to kind of push this this, this thing. Their, their agenda because it's already been set versus the Austrians have, have a lot to contribute and thus, you know, high incentive to participate in those, those those if you, if you want to call them,

Phillip Black: 1:53

Yes we are back. It has been forever. We've been trying to get Everyone together. And unfortunately we couldn't even do that today. Eric is sick. Unfortunately, rest in peace. He was, he was hitting the fight and games hard as they like to say. And his place, we have a guest. We've been trying to get on the podcast for a really long time. Let me know if I'm saying this correctly, Dr. Matt McCaffrey.

Matt McCaffrey: 2:15

correct.

Phillip Black: 2:16

Like, they're like the running back

Matt McCaffrey: 2:18

Yes, you know, and in fact, I grew up in Colorado and I used to, he's no relation to me, but I used to lie at school and tell people that he was my uncle to, to impress them. So, yeah, so exactly like that.

Phillip Black: 2:33

we have been following each other on Twitter for for quite some time. And what initially turned me on to a lot of your research is that you talk about games. Like, you do the traditional economics academic research, which I'd love to talk about. But you also talk about games quite frequently. Why? What's wrong with you?

Matt McCaffrey: 2:49

Well, to some extent I guess I'm a glutton for punishment. When we get on in a little while, I think we'll talk a bit about loot boxes and some of that controversy. And yeah. That's a good example of how you can spend now years and years making the same arguments and not really getting anywhere, you know, just banging your head against the wall. So you know, in a lot of ways, it hasn't been super beneficial for me, but it's just something that I've been interested in for a long time. I mean, I was I played games long before I had any kind of academic interest in them. And then, as I started to go through the early years of my academic career, I. You don't notice that, you know, it was a time when there was just sort of one controversy after another in gaming. I mean, to some extent, I guess that's always been true of the video game industry. It's just the nature of the controversies change, but, you know, I started to notice some of these, these controversies coming up and they had a lot of economic sides to them. And at the same time, I also started to notice that other people were doing research that was, Often ignoring the economic aspects and of these different problems, like loot boxes, for instance. And so, I thought, alright, I just, I, I can't help myself. I gotta get in and, and try to inject a little common sense into the discourse.

Chris K-S: 4:14

Mean, even by economists you know, standards, your work is we should call it nerdy. I'm kind of curious, you know, obviously, you said you're a glutton for punishment. Writing academic research and economics is already kind of a headache. Writing academic research that's focused on video games, Even in some contexts, fantasy more generally you know, what kind of what motivates you and I, I would imagine that there's two different sources that it could be. It could be. I want this to be seen because I think it's important. And that's kind of what I, I think my motivation, if I ever end up writing another academic paper would be because I think it's important. And I think people should know about it versus. I just like it. I'm much more efficient. If I'm working on something I think is interesting versus if I am working on, you know, 10 million labor econ study.

Matt McCaffrey: 5:02

So that's exactly right. It's a combination of both of those things. I mean, obviously the world is full of controversies, the world's full of things that economists can talk about, and obviously you gravitate towards the things that you're already interested in personally, and like I said, you know, I've been playing games since I was a kid, and it was, you know, when I started to see these controversies popping up in the industry, already I had a sort of an in, you know, had a sort of an intrinsic interest in. How these things play out and what people say about them and so on. So that made it very easy to get into that kind of research and also at the same time. I, I do believe that it is important. And again, I'll mention the example of of loot boxes. This is something where, as I looked at this debate, could see that, you know, whether it was popular writing or academic writing, a lot of people were, you know, Simply talking a lot of nonsense about it. And, you know, I, I take that and I took that personally as the, you know, the Michael Jordan meme says you know, so it, it really helps motivate me, you know, some from both angles. There's a personal side of it, but also just decide that, you know, I really, you know, I, I don't like bad arguments, you know, I like good arguments and there's an awful lot of bad arguments in the public discourse around all aspects of the video game industry.

Phillip Black: 6:22

But if we were to continue along this thread, what do you think is the steel man case for loot boxes? Like if we were to steal mana case for loot boxes, what do you think that looks like?

Matt McCaffrey: 6:31

Yeah, so there's 2 perspectives. There's the consumer side. There's the industry side of things, right? So, from the industry perspective, the best arguments are along the lines that. Triple A game development, especially I mean, I think game development at most levels, but particularly triple A development is getting more and more expensive all the time. It's getting more and more time consuming. And along with that, there's been a massive increase in uncertainty. Video game industry is always highly uncertain. It's very difficult to predict consumer preferences, especially going four, five, six, or more years into the future, which is, you know, how long some of these development cycles are taking. So it's, it's become, it's a highly uncertain and a highly costly industry to be in. And game developers are looking around for ways to augment revenue because the typical sticker price, Revenue model isn't enough anymore. And it's, as I said, it's also quite highly uncertain because, you know, we've seen so many cases in the past few years of games that cost hundreds of millions to develop and they come out and they bomb and they have maybe 1200 simultaneous players on steam in their opening week of release. You know, that's a terrible sort of financial hazard to have to face as a developer, as a publisher. And so you need some way to augment your revenue. And loot boxes are one way to do that within the broader umbrella of microtransactions in general. But loot boxes are one way to to do that, that companies, that companies have tried. So financially speaking, I, I I think the, the case Is is is pretty strong. Obviously, that's not really what most of the debate has been about, though. Most of the debate has been about the customer facing side of things. And on that side of things. I think the case for loot boxes is a case for experimentation by developers with mechanics that gamers might be interested in, right? Obviously, the video game industry depends heavily on innovation and on novelty, and sometimes that involves novel, Financial transactions as well as just, you know, novel, pure gameplay mechanics and things like that. So developers are also trying to figure out exactly what consumers might like. And in that sense, I think loot boxes should be thought of as an experiment. You know, in entrepreneurship, sometimes they talk about sort of discovery you know, or or economic competition as a discovery procedure is high. Thanks. F. A. Hyde's term for it, and I think that's what's going on in the video game industry with loot boxes and similar types of revenue models. It's the video game industry sort of struggling in the dark through all this uncertainty to try and figure out a model that will work financially, and it'll also provide consumers with something that they find novel or interesting. And and that's, I think, I think loot boxes are a good example of that.

Chris K-S: 9:30

So you, you've written a lit review basically of loot box literature I think within the information systems context I, I saw a bunch of different references. I didn't look them all up, but I, I think most of them were kind of this information systems which is kind of the intersection of. I don't know. Tech and economics. You, don't really dispute the nature of loot boxes in that article. You're not really, you're not really, you know, breaking down what is a loot box. You're, you're really taking this latent variable approach where you're saying, what is the outcome? What does the outcome look like for people behaviorally? What does the outcome look like for them economically? I guess like, you know, I'm curious to get your thoughts as we talk about the industry revolutionizing their you know, or discovering new ways to monetize obviously, the key criticism of loot boxes. They're like gambling. They're like a casino. You know, it's it's a slot machine. What is your take I guess personally and then also academically, you know, in the context of that paper mechanically as in terms of the mechanism design, what is a loot box and how does it compare to traditional, more like not traditional, sorry how does it compare to it's you know, apparent cousin the slot machine.

Matt McCaffrey: 10:44

Sure. So. There are a lot of different definitions of loot boxes, and this is one of the things that's kind of been confusing in the literature, because when people study people, gamers behavior when they buy loot boxes and things like that, it's not always clear exactly what they're studying, or, for instance, because this is literature, it's all survey based, so it's not always clear what Respondents think they're talking about. So there is a lot of confusion about this. Now, just for the purposes of this discussion, I will say, so loot boxes are randomized in game awards that players can sometimes buy using real world money, right? So there are So there are a variety of ways to earn them in games. They can either be earned through completing various sort of challenges, they can sometimes be purchased using a purely in game currency, or sometimes they can be directly or indirectly purchased using real world currency. So sometimes the in game currency acts as a kind of mediator, where you switch real world for in game currency. in game currency and then buy a loot box indirectly, right? But the point is, in some cases, including some very high profile games you can spend real world money on loot boxes. And that's the part of the, the mechanic that has proved controversial, and that's the kind that has inspired these comparisons to things like traditional gambling and so on, okay? So, with that in mind, How do they, the two things sort of fit together. So cosmetically sort of superficially, I think they are, they do look very similar because again, you can spend some real money for an uncertain or a randomized prize. Right? So you don't know the outcome. So that seems like it's similar. And at the same time, there are other things that people talk about as well. For instance just the aesthetic aspects of opening a loot box. You know, there's a, there's a treasure chest on screen, it opens, there are big sounds, big lights, you know it's supposed to be very exciting and so on. And a lot of people say, well, isn't that very similar to sort of how slot machines work and they're trying to, you know, encourage you to get excited and so you'll continue to, you know, to pull the lever, so on. So that I think is, I think that is all true. At the same time, I do think that there are some underlying differences between the. Loot box mechanics and the way that most traditional gambling works and exactly, you know, depending on exactly which definition you take or which things you're looking at, these things, they can sometimes fit within legal definitions of gambling, because these are the two sides of this, really, because there are legal definitions of gambling that Are similar, but also different between countries. And then there's the sort of behavioral side of things, which is when people open or buy loot boxes, do they behave in the same way that say compulsive gamblers behave or, you know, slot machine addicts or something like that. So, so on the legal side of things, sometimes they are similar. Sometimes they do fit and they fit better. The lower the bar is basically so in some countries like Belgium, for example, they have fewer. Restrictions in their definition of what constitutes gambling. So it's easier for loot boxes to fit that. And they did. And that's why very early on in that controversy, Belgium sort of outlawed them. Their gambling commission was able to do that. But in other countries like the UK, for example, where the standards are higher, and there are more criteria to establish what constitutes gambling or a game of chance, they're The gambling authorities and so on have been a lot more sort of circumspect. So just, just as some quick examples of how things might be different. So first of all, the notion of a stake that you would typically have in gambling, some money that you put up is not exactly the same because for example, loot boxes are available for a fixed price. Right? There's nothing uncertain about the price you pay, and there's no uncertainty whatsoever about whether or not you will get it back, because you won't, right? It's a price, you pay it no matter what.

Chris K-S: 14:43

I lost.

Matt McCaffrey: 14:45

of things one, many if not most loot boxes do not give you a reward that is either money or money's worth. So this is a very common criterion in legal definitions of gambling is that the what you win has to either be money or be easily exchangeable for money, you know, or something, you know, something that has some monetary value. So that doesn't apply to loot boxes. To a lot of loot boxes, right? There are big cases. You've got the counter strike cases and so on, where there are secondary markets for loot, but those are really the exception rather than the rule, right? So again, there are a lot of different facets of these definitions and depending on which ones are all in, are in place, loot boxes can look more or less like gambling, but. My point is that I think I would be suspicious of anybody saying that they these are sort of intrinsically gambling. That seems to me to be a bridge too far. In the extreme cases, yes, they do start to look like that. But most cases are not extreme. Right? And and also, yeah,

Phillip Black: 15:49

are the extreme cases? What are the ones where you concede gambling?

Matt McCaffrey: 15:52

well, so for example, you've got In the Counter Strike case, and you've got skins gambling in some of in EA's older FIFA titles and things like that you have sort of thriving secondary markets for loot boxes, loots, and things like this. Of course, it's important to point out that that actually is illegal usually and players who do that are usually violating their end user license agreements and you know because typically, at least, you do have to agree that you are not Going to going to, to sell this loot let alone sort of gamble it in some kind of secondary market. So you've got some, some, you

Phillip Black: 16:28

Why is that the line?

Matt McCaffrey: 16:29

Hm?

Phillip Black: 16:30

Why is the secondary market the line that a game needs to cross? Now I understand all these are against the terms of service, but like, So if I accept your definition, The one I always go back to is Pokemon cards. Why are Pokemon cards not under the same definition? Because there's a secondary real world market for Pokemon cards or for magic, the gathering cards. So like, I hear this kind of, in the Netherlands case, they called it like in circuit and out of circuit money, like whether or not you can redeem anything for real world value. And I think that's a really important point because it prevents gamblers fallacy because you can never, you can never earn it back. Right. You, you know, it's in the system. I think that's a really important psychological point too, but I don't understand why a secondary market is like this crossing line and, and why Pokemon gets a separate set of rules. Cause no one is willing to say that Pokemon is gambling, Pokemon trading cards.

Matt McCaffrey: 17:13

Exactly, exactly. And, and that is basically the reason why I would argue that loot boxes are usually, Not gambling is because typically they do fall into exactly the same type of transaction that you get when trading Pokemon cards or trading any of these kind of collectibles that you pay money for but that also have a randomized result. So I do think that those are similar. And for that reason, loot boxes should probably not be thought of as, as gambling in any kind of strict sense when it comes to the secondary market. That's not usually sort of the dividing line between what makes something gambling or not gambling. I think it's more part of the discussion because it's about whether or not people are. It's about whether or not the act of sort of buying the loot boxes itself. That's the sort of the behavioral question you're trying to figure out, right? If you could trade it in a secondary market, That's sort of interesting. I mean, that's, it's important to talk about, but it doesn't really say anything about the sort of the behavioral side of things. Right? So I don't, I wouldn't say that people are using the secondary market as a kind of criterion for whether or not these things are or not gambling. It's just there. I think more as evidence of. Sort of a broader economic problem or the potential monetary worth of some of these types of things is if people can manage to create these secondary markets, right? So it's, it's kind of feeding back into part of the definition, I guess.

Chris K-S: 18:47

so I think like from my reading of your review, the main like I mentioned this earlier, the main evaluation criterion is, is outcome based. It's it's what is the, what is the. Psychological impact on these people. What's the financial impact on these people? Is there a secondary market? Are you trading after, after the fact versus what I think we should be evaluating is the actual mechanic itself. What is the mechanism? Because. To Phil's point, I do actually think if we're going to call loot boxes gambling, then we should call Magic the Gathering and Pokemon packs, physical packs gambling as well because it's the same mechanical, you know, thing I use an example. And this is this is not proving my point. It's almost a counter. Think it proves the point. But Taking in another approach. So like, let's take a gun. If you were to give a gun to a group of 10 Tibetan monks, they're probably not going to kill anybody with them. They're, they're just going to take that gun. They're going to bury it. They're going to put it away. Same exact mechanical you know object. You take that gun, you give it to a group of, you know, 10 teenagers, troubled youths that are, you know, you know, at the local like youth, um, correction facility. Going to be a very. Different. I know, I know. But

Phillip Black: 20:01

give it to the YMCA. Hey, you want a handgun kids?

Chris K-S: 20:05

but you still don't say it's the same exact mechanic. It's the same mechanism, but a totally different outcome. And if we're looking at those outcomes, we're going to completely miss the death. We're missing the point. We're missing the evaluation that we should be doing. We're saying, oh, well, this is bad because, you know, it has outcome B and this is good because it has outcome A. That's not the right way to look at this, I don't think, because we could end up calling a gun, you know, a gun or a gun not a gun when we should be calling it a gun. Oh, nobody died, so it's not a gun.

Matt McCaffrey: 20:35

So, so I see what you're trying to say, and I think, in a way, what I was arguing in that review is actually. Consistent with what you're saying, because what I was arguing the reason I look at things like outcomes and the behavioral side of things is because that's basically how that's that's the way that empirically we assess exactly whether or not these things are dangerous. So in your example the problem is, is not that we have a gun that we're giving to somebody and we're trying to figure out who to give it to and who not to give it to. The problem is, We have this sort of box, no pun intended, and we don't know exactly what's inside it, right? So, and the only way that we have to absorb, you know, to figure out whether or not it's something that's potentially dangerous is to see how people use it, right? So it's, it's, that's, that's the crucial reason why we need sort of the empirical side of all this because we need to see how people use it and do, in fact, people use it. react to loot boxes? Do they spend on loot boxes in the same way that similar people spend on casino games like slot machines and things like that? So that's the big question. And that's one of the big problems in the literature is that everybody's kind of assuming that because there are some Superficial similarities between the 2 things that they must be sort of functionally equivalent to this. And that's 1 of the purposes of my review is to say, no, that that doesn't necessarily follow. That's something we need to investigate. You cannot you cannot assume that. But many of the methods used to evaluate. Loot box purchase behavior and things like that do implicitly assume everything that they need to prove, right? Because again, of course we could find definitions of gambling that seem to fit loot boxes and so on, but those aren't necessarily significant, right? That's just the law. That's just the law. Something, you know, that's the law that somebody invented. It's not written into the fabric of the universe that that's what constitutes gambling. Right. What we care about, or at least what I think we should care about is people's behavior and people's welfare. Right. How do they actually buy loot boxes? And do they seem to exhibit addictive behavior? And do they seem to face the same kind of problems that say compulsive gamblers face, you know, are their lives destroyed? Do they go bankrupt? Their families implode, this kind of stuff. And that's one of the crucial things that show in my review is that very few people were even talking about those questions. And those that are, aren't showing any kind of compelling evidence that these, these things exist. Terrible sorts of things are happening at least not in any kind of scale.

Chris K-S: 23:10

yeah,

Phillip Black: 23:11

What's an experiment you would accept that would show that? Like, what would you find as compelling evidence if you had to design

Matt McCaffrey: 23:17

Sure. So this is this is the difficult question. Is exactly how you would define it. So it's not that difficult. I think to sort of abstractly design what the experiment would look like. But basically what you would want to know what you would want to have is a longitudinal study that looks at loot box purchasing behavior. Over time, and compares it to a number of sort of key criteria, right? Looking at purchasing frequency and not just that, but you know, the absolute amounts spent and also amounts spent as a proportion of disposable income, right? So, so you have a core of sort of key metrics, looking at these kinds of things. And then also as much as humanly possible, some kind of, Welfare metric, right? Because again, even all of this data, if you could get it, it wouldn't necessarily tell you the bottom line question, which is what effects does this have on real people? Like, does it increase their welfare? Does it destroy their welfare? How does it affect their families? And these kinds of things, right? So. This is not an easy sort of experiment to design, you know, it's sort of possible in theory, but in practice, it's very difficult because to get all of this data together and to make sure that the data was actually reliable and consistent and so on. That is, is extremely difficult to do.

Chris K-S: 24:41

your, to your to your point, Matt, there's not even a clear definition of what is a loot box versus what is you know, a slot machine in the way I would. Set it up is I would have a treatment variable that is, did you receive the loot box treatment or did you receive the casino treatment, the gambling treatment? And if those two things are different, we should see a statistically different outcome for those people, assuming they're identical people. Right. That's kind of like this, the experiment that I'm setting up

Phillip Black: 25:11

Economically different too, though. Like it's not enough just to show a difference. Like we have to show that the coefficient matters, right? Like this has to really, I think, show downhill. We don't want to be making policy interventions over like a point negative one coefficient,

Chris K-S: 25:25

what are the, and, and, and in this, to, to be clear the, the reason, okay, so there's two complications. The first thing is we actually want to show that if we're saying that loop boxes are the same as a casino, we need to show that there is no statistical difference between the outcomes of the two things, which is like not as easy to measure statistically than a statistical difference, right? It's like, okay, why aren't they different? There's probably some unobservable. And then the other component here is, is back to Matt's point. Like. What, what are the definitional differences? We would need to have two things that 100 percent of people say, this is casino. And 100 percent of people say, this is loot box. Because if there's any, if there's any, you know, overlap, it's not, it's not a clean experiment because it's ambiguous what these things are. You can't say A or B because A is part of B and B is part of A. So I almost think that it's. At least in that context, maybe I'm setting it up wrong. Like it's actually impossible to to experimentally determine whether or not. A loot box is gambling.

Matt McCaffrey: 26:27

in many ways, I think you're probably correct. I mean, I think the best you can kind of hope for, as you say, is to sort of put the behaviors side by side and see what happens. Or do people react in the same way, right? Whether you're using a quantitative or a qualitative type of metric to assess this 1 way or the other. You need to be. You need to be comparing these, right? And also it's. Crucial that the people who are sort of doing this or, you know, in the case of the current literature or answering survey questions and things like that, actually know what it is that you're talking about as the researcher, because it's very often not obvious at all that this is the case. So there's so many different problems with with just figuring this out. And it's, it's very similar incidentally to the other great controversy in the history of the video game industry, which is about video games and violence. Right. So superficially,

Phillip Black: 27:24

rest in peace. That argument, what was that? 1990s to 2010s. I remember psychologists going on Dr. Phil, like trying to point out the similarities in brain activity. You remember that?

Chris K-S: 27:35

Oh

Matt McCaffrey: 27:35

it was a huge thing. And, and by the way, it's still going, like there's still literature on this

Chris K-S: 27:39

I was going to say, I know people, I, well,

Phillip Black: 27:42

It's, it's. It's died in the public forum though. The public forum has rejected it. It's not a regulatory topic anymore. Even loop. I mean, that was the other thing we didn't get to talk about. Like, it's kind of like Pax loop box, Kana right now. Like it is peacetime on the war front and Roblox has basically been immune to criticism except for the Hindenburg report. And I've been amazed. I've been amazed at the level of randomness that exists in games, targeted at young children, and no one has gone after it. It

Chris K-S: 28:08

lot of randomness. You think

Matt McCaffrey: 28:10

Yeah, so I mean,

Phillip Black: 28:11

me? Bloxfruit has RNG, like everything you would consider loop boxes exist in,

Chris K-S: 28:16

can you buy a loot box in, blocks

Phillip Black: 28:17

Absolutely, absolutely, they have RNG mechanics.

Chris K-S: 28:21

I played for like four hours and I didn't see any, Loot boxes.

Phillip Black: 28:24

are a lot of daily spinwheels, even if they're not monetized,

Chris K-S: 28:27

Yeah, those are, those aren't monetized. Like you can go and you can buy. Any, any item you want, you can buy in the store in Bloxfruits. There is a, there is an alternative. There's a substitute for that random process.

Phillip Black: 28:41

I think that's interesting. It affects the definition or whether or not it holds any legal water. I think, I think that's fine. Like, I think maybe Matt to give you like the game, the game economist perspective, because I think that's the other thing we want to talk about is like, from a design perspective, loop boxes, solve problems for us. I think one of the things Eric wanted to mention that I totally agree with him is it helps us fractionalize content. So one of the things that we like finding games is that there's a high willingness to pay for digital good, because that digital good is durable and pays dividends over a long period of time, which is however long you play the game multiplied by how many times you use the item. So if you buy like a MOBA character in league of legends, that is giving you a stream of dividends for a long time. And so breaking up that value is. good because it also lets us dose it out to players. And we can, I think we can basically hit spend caps that we couldn't otherwise. So the question is like whether or not loot boxes raises price. And I think it, it does to some degree. But it basically also makes it accessible for low players with capital constraints. So now you have a fractionalized opportunity to get something that's worth a lot of money that previously would be inaccessible to you because you wouldn't face, you, you wouldn't have enough capital. And so like, that is a really valuable tool that we, that we use to basically dose those progression of players.

Matt McCaffrey: 29:53

I think this is exactly true, and it goes back to what I was saying before about using these kind of mechanics as a way to discover what it is that consumers want slash are willing to tolerate in terms of in terms of their spending. And it's an attempt, I think, to try and find some of these audiences that. would not normally be willing to to pay, say, full sticker price for a AAA game because it's just not their thing, right? So, again, so one place where you see a lot of, where loot boxes, I think, are quite prevalent, of course, is in free to play mobile games and things like that, right? Which typically have, you know, at least a substantial lack of overlap between you know, the types of people who play those games and the type of people who pay full sticker price for for a triple a game. And, you know, developers, publishers, and so on, they don't know in advance exactly what these customers are going to want or what they're going to be willing to play, what they're going to be willing to pay for, and so on. But they do have, they can bet. Very good money that they are not going to shell out 70 to, you know, to 100 for a game rather they want the traditional free, free to play model, right, where no money costs to get in and then small payments after that you know, so it's just a, it's a very straightforward, I think attempt to appeal to different customer segments and bring customer segments into the market that would not normally be a part of it.

Phillip Black: 31:22

Why don't we see this in other fields? Like, why don't we see lootboxes at restaurants? Why don't we see lootboxes in theme parks? Why don't we see it at, I don't know, Chris, is there any other, Walmart, Target? Like, why am I not just walking in buying a lootbox and walking

Chris K-S: 31:34

I, I think it has to do with the durability of, of digital goods versus physical goods, right? It's much easier to do a loot box in the digital world because like the, the FAF, the, not the FAF, the the, like, leftover stuff that you don't want is really easy to dispose of. Versus at a restaurant, if I get a loot box meal, I'm going to eat. Like, first of all, there's a physical component of starvation. Like if I get a bunch of food, I don't want, I'm going to die. If I get a bunch of food, I don't want, it's all going to go to waste. It's just an extremely inefficient process because unlike digital goods, the marginal cost of producing real physical stuff is very high, you know, marginal cost

Phillip Black: 32:10

cost of a miss is high. Okay.

Chris K-S: 32:12

Yeah, dropping the marginal cost. The marginal cost of dropping somebody skin that they don't want is, is literally zero. It's like, you know,

Phillip Black: 32:21

Zero storage costs in the digital

Chris K-S: 32:22

of a penny. Yeah, exactly. Versus the marginal cost of, you know, sending a filet mignon to a vegetarians table is is quite high.

Matt McCaffrey: 32:32

Exactly. And there's another aspect of this too, which is, which also comes back again to similarities or lack thereof with gambling, which is that loot boxes are not generally Independent goods, they're sort of, they're, they're only ever compliments. They have no value, essentially, outside of the context of a game. Right? Whereas, you know, you go to a restaurant and you order a, you know, a loot box meal. Well, presumably, it's because you want a meal and that's the good that you're trying to consume. Whereas loot boxes only exist in the context of these other games that you're going to play, it would make no sense. I mean, nobody would buy them. If they didn't have some kind of connection to the game, that's a crucial part of the value they have, even when they, even in those cases when they do have some kind of like real world monetary value, ultimately, it comes down to the fact that they have cosmetic value or functional value within a game. So, in a way, they're not even independent products in the same way that you would, for instance, if you went to the loop. The supermarket or the restaurant or whatever and had, you know, a surprise box that you could buy and who knows what's going to be in it. Right? So, again, it's a very different offer. I think economically for for people.

Chris K-S: 33:46

Interesting. So I know you're not a web three person, but that's almost an argument against web three, because in web three, the whole idea is interoperability and inter durability. I can take this and bring it from here to there. The goods are all complimentary versus, you know what would it be? I guess if you had called them perfect substitutes, they cannot be or sorry, perfect compliments that cannot be exchanged between environments.

Matt McCaffrey: 34:10

Yeah, exactly. Exactly. They always, I think, have a kind of a complimentary aspect to them as opposed to. The vast majority of goods and services we consume every day, which are valued for whatever their own properties are,

Phillip Black: 34:25

So, 1 thing I'd like to do before we get into what we've been playing, which I do want to do is I would love to understand how we look at Lou boxes through Gary Becker's theory of addiction, rational addiction. And for listeners who are unfamiliar, this is Becker's theory that. You can have a quote, a rational addiction because a lot of the signs that we normally associate with addiction aren't really addiction. Or at least that's how I read the paper. So the most, the most powerful argument I remember from that paper and feel free to disagree with Matt, but I remember like how people respond to prices being a really important part of observing this. So 1 things we observe is that. You know, people who are quote addicted, they still respond to like changes in the tax rate that when we put on cigarettes, people will quit smoking and we can kind of observe their elasticity, so to speak. I don't, I don't think he really comes down on like, okay, well, is there an elasticity that is now considered addiction, but he, he is trying to provide a framework for us to think about that. A model is, is that the, is that the way should we think about it as economists when we go into these loop box studies?

Matt McCaffrey: 35:24

well, it's, it's, it's a really important part of it that needs to be part of the conversation. I won't be quite as, you know, as they, they always call. Gary Becker, the the economic imperialist on the grounds that, you know, the critics always say, you know, he wants to make it only about economics and economics is always.

Phillip Black: 35:42

March, March,

Matt McCaffrey: 35:43

So I'm not quite as a, as a, as extreme as. The critics imagine Becker was, but it absolutely has to be a part of the conversation because without understanding people's economic behavior, you can't understand these behavioral issues that I was referring to before, right? Because you're absolutely correct. People do respond to price changes. People do respond to policy changes in the form of different tax rates and things like Of course they do. And they do that just as much. With their loot, with loot box purchases as with any, as with any other kind of purchase they would make. So you, you, you can't consider the policy you know, you, you know, no matter what your policy intervention might look like, you can't. reasonably considerate without at least taking this kind of stuff into into account because it is crucial. It is a crucial part of the story, even if it's not, you know, the entire conversation, you know.

Phillip Black: 36:40

We got to talk about what we've been playing. It's been way too long. I think we should start with our guest. You're a gamer. You were, you were forced into games. That's one point or another.

Matt McCaffrey: 36:49

Yeah, yeah, no, I mean, I started playing games sort of, or I guess mid 90s is the first time my family bought a computer and then Later on my parents were not thrilled you know, with with the concept of video games. They, they always, you know, they gave us the usual, you're going to waste your life doing this and and all of that. And although I have

Phillip Black: 37:09

Little did they know I

Chris K-S: 37:10

look what we've all done,

Phillip Black: 37:12

Little did they know they were

Chris K-S: 37:13

our

Matt McCaffrey: 37:13

exactly. That's the problem is that they were, they were exactly right. But fair play to them. They were very, yeah. Generous and tolerant. Although when we were I think it was about 14 years old or something like that my brother and I bought an N64 used at a pawn shop but we weren't, we weren't allowed to have it. So we hid it and we would wake up at like one in the morning. Go and plug it in and play gold and I for like three hours and then crash out and then wake up and go to school and so on. So, yeah, but in any case yeah, so it's, it's been a little while. It's been a, been a few generations worth of of games that I've been interested in as to what I've been playing. Actually. Have kids, so I don't play as much as I do, you know, when I was a, when I was a bachelor and it takes me a long time to get through games, but I've actually been playing a lot in the past month or so and managed to make it through many more games than I'm usually able to. But recently I played Return to Monkey Island, the point and click adventure game. That's a genre that I've loved since way back in the day. And it was nice.

Phillip Black: 38:14

Oh, gee

Matt McCaffrey: 38:15

Yeah. Well, this is a new entry in the series that came out a couple of years ago from the original creator. So

Phillip Black: 38:22

what year was it? Cause I remember it was, it was kind of billed as a retro revival,

Matt McCaffrey: 38:26

it was, I think it came out in maybe 2022 ish, something like that. And the original is from the early nineties. So, you know, it's, it's that's franchise that's been around for for quite some time. So that was fun to play. It's always nice. It's lots of great nostalgia value without. Without doing it too much, you know, good, good, good amount of old and new at the same time. And then I completely shifted gears after that and I played Black Ops 6. But but I have to say only the single player campaign because I, I do not play Call of Duty multiplayer, despite the fact that that's what 99 percent of the people in the world play those games for. I exclusively play them for the single player campaigns.

Chris K-S: 39:06

Didn't they release one of the Black Ops without a campaign at

Matt McCaffrey: 39:10

I think they, I think they did a bit four or five or something like that.

Phillip Black: 39:14

Sina is a huge mistake. Battlefield did this to,

Chris K-S: 39:18

Why I'm kind of curious. I didn't see

Phillip Black: 39:21

costs live service is remember live service is a money factory, right? Like you're trying to build an engine. That is a money tree. Okay.

Chris K-S: 39:29

Why was it seen as a mistake

Phillip Black: 39:32

Because it turns out there's a lot of people who were actually interested in the single player like it hurt premium sales They yeah, it was it was mad. They lost

Matt McCaffrey: 39:39

exactly, exactly. I took my money elsewhere and I guess the industry really paid attention but more seriously, I mean, I think it's a straightforward issue, right, is that single player campaigns unless you augment them with microtransactions, loot boxes, et cetera they don't really, by themselves, they're not obvious revenue generators, whereas live service multiplayer games aspects of games very clearly are You know, cash cows. So I think sometimes I think they just yeah, I think they just made a mistake and they just kind of underestimated the extent to which people actually appreciate a good single player campaign. But after

Chris K-S: 40:14

you consider yourself a but do you consider yourself a console game or a PC game? Or you said your original con like video game was on PC

Matt McCaffrey: 40:22

these days, I'm, I'm strictly a console gamer. I just, at this point, family life and all that. I just, I don't have the time or the money or the energy to to, be a really dedicated. PC gamer. So it's just it's so much cheaper and more accessible to to be a console gamer at this point. So and I know that PC gamers hate that, but, you know, that's, that's, that's the way it is. So yeah. And more recently I've been playing, right now I'm in the middle of Indiana Jones and the Great Circle, which is phenomenal. It's the most fun I've had playing a game in quite some time. And I was actually, I was genuinely very surprised at at their ability to capture, you know, So much of the fun of being Indiana Jones and also combining a lot of elements of great Indiana Jones games of the past, including going back to like the point and click adventure games, which you would, you would think. That's really outdated, you know, that, that, that, no one cares about that genre anymore, but, you know, they bring a lot of elements of it into the, the, the modern game, and I, I find that, I find that really impressive,

Chris K-S: 41:23

I think it's interesting that you, it sounds like you're pretty big into campaign games, single player games. You're not really a

Phillip Black: 41:29

disgusting. I hate it. It's so gross.

Chris K-S: 41:33

not, we're not allowed to, me and Eric are not allowed to talk about single player games in Phil's presence.

Matt McCaffrey: 41:38

there's only so So many times you can have your ass handed to you by a 13 year old in a multiplayer

Phillip Black: 41:46

be

Matt McCaffrey: 41:46

before you get sick of it and realize, like, I can't spend my life doing this.

Phillip Black: 41:51

doesn't need to be PVP. Could be candy crush. Could be anything like I don't, I'm, I'm not judgmental at all, but like all. So here's, here's my, here's my issue, Matt, is that the, the kind of like disconnect right now, or the problem is that economists look at games and they think about what it can do for them. And I don't ask what they can do for games. And so I don't see microeconomic theory on in game mechanics, right? We have little, very little to say about how you should optimally design a game. Why is that the case? Like, shouldn't we be, Extremely interested in like taking the economic imperialism and marching straight into games and dominating, like, what is the missing link that we're not seeing this happen? Like we do this in every other field. I don't understand why we haven't taken over game design yet.

Chris K-S: 42:37

I mean,

Phillip Black: 42:38

I mean, I'm trying.

Matt McCaffrey: 42:40

good question. I mean, I think a lot of, I think a lot of it revolves around issues relating to the economics profession. So, on the one hand, you have I mean, even, even though gaming has been mainstream for forever at this point, you still have a good proportion of economists who, for whatever reason, because they're a little too old, or because they just have different interests, just really aren't overly concerned. With with games as a field, right? This is something, obviously, we would expect to start changing drastically, particularly in the coming years as newer generations of economists come up who were raised on games and so on, you know, so I think that aspect of it will probably change, but related to that, I think it's again, there's a bit of a professional barrier because it is just very, very difficult to get Mainstream economists interested in economic issues relating to games, right? So, for example, you pointed out, yes, you know, I think there's a lot of the metaphorical dollar bills lying on the sidewalk when it comes to what economics can it can can can add to gaming. But again, The vast majority of economists who produce research on these kinds of things aren't really interested in speaking to that kind of audience. They're interested in mainly in speaking to the economics profession. And, you know, they're, they're academics. They have incentives just like everybody else. And those incentives, I think, tend to push them away from the very practical applications of these kinds of things. And much more towards traditional academic research that really isn't read. By most members of the general public, or even sort of industry experts and things like that. So I think at a lot of different levels, there are incentives that are pushing economists away. Some of those, I think, are going to get better over time, but at the same time, you know I think it requires, it does require a big investment in terms of time in terms of you know, resources that you have available to you. to really want to get interested in, in doing this kind of work. Because it's just, again, it's not for everybody.

Phillip Black: 44:51

So what about from the producer side? Right. So let's take it from the example of like Amazon. So I used to, I used to work at Amazon game studios and I can tell you the number of tech economists outnumber the number of game economists by like, you know, I don't know, maybe, maybe 2001. I mean, what was it? Amazon is the biggest employer of economists outside the US government. It's like, don't get me wrong. It's, it's certainly a place that invests quite a bit in its economics team. But I also see a lot of. Yeah. Economists pop up at tech startups, particularly ones with marketplaces, to be fair, like Instacart. Why, why we even see it in the private sector that they seem to invest much more capital in us than they do in games? Like, why are, why is the tech economic function for economists different than for games?

Matt McCaffrey: 45:33

That's a good question. I'm not sure I have a fantastic answer for that. But, I mean, Just sort of logically, the first place to always look is what's the expected return on this. And I think probably, at least on the surface, it's, the return is more obvious for investments in tech types businesses than in games as such. Right? Particularly because, You know even if you end up working on sort of like multiple games, it's one thing to design, you know, and the economic side of a major corporation, but designing the economic aspects of particular games is a very different kind of work. It's more fragmented. It might require. You know, more change, you know, more differences between systems, things like this. And I think probably over time, because, I mean, look, games are sort of ultimately products, probably, coming back to that good old sort of marginal cost, marginal benefit, I think the, you know, the marginal cost of hiring, you know, economists to design your marketplaces probably Lower to developers to publishers than whatever the marginal benefits happen to be. But again, I can't say too much on this cause I don't, I didn't have any insider information on this one, particularly

Chris K-S: 46:55

So Phil, your question is, why do, or sorry, why do the producers of video games not employ the practitioners of economics? That would be an industry economist, not necessarily academic economist. to actually design. The game itself, you know, I'm, I'm playing a single player game, you know, this is how much, this is how many sticks I get when I versus what they're usually employed for is data science or like live service design how many loop boxes does this person get per day? How many spins at the wheel do they get? How many, you know, Very units of very dust is their account, you know, get every day and what's available in the marketplace. Is that like the,

Phillip Black: 47:39

No, I wouldn't even, I wouldn't even put that constraint. I think there are more economists hiding in this industry. They just have the title data scientist and they just focus on the empirical question, which I think is something that the tech firms are really driven as us having a solid understanding of, like, there's been a lot of threads on this was it Anthony Lee from the university of Chicago who wrote that web three papers tweets about this, but like the reason we, I think we, we do dominate data science departments is that we have causal inference and a lot of the times that's what businesses are looking for. I will say like, we get trounced when it comes to like machine learning and just doing straight prediction, ironically enough, like, like, if it doesn't have like a regression or coefficient, we can read, we don't care. And sometimes businesses do care. Like LTV prediction is like a really good business case that economists have been laid to stray on. Cause we try to build causal models and like log linear curve fitting is way better, just like throw a current run on that thing is a way better way to show LTV. So I don't even think it's like, it's like economists can add value. Anywhere, I'm just surprised that there's not more of an investment because the, I think economists and games can scale pretty well. I guess it depends on the size of the firm. I agree with, I agree with Matthew's argument, by the way, that like, they're just limited gains to economists because our efforts don't scale as well as tech software. I think it's just the reality. Like, if you work at Netflix, you can operate over a much wider surface area, whereas a game can only grow to such a high Tam, right? So you're operating over a smaller service area of capital. Yeah.

Matt McCaffrey: 48:59

exactly.

Chris K-S: 48:59

I mean, also, like, you'll probably get a similar result for game design. If you use a game designer, who's who's a really good game designer, you'll pay a lot more for the economists, though.

Phillip Black: 49:10

Yes, well, I think, I think look at the games that do have economists, right? I think this theory predicts it like call of duty has an entire economics team. I didn't know if you knew that math Christopher gals over there. I mean, one of our friends is over there entire economics team. We know King King stole someone from the for economics research group. Steve Levitt's group actually converted them back to King's experimentation team and also worked with Leavitt himself. We know valve hires economists and we know that very well. I mean, you've written, you've written on valve as well.

Matt McCaffrey: 49:38

Yeah, I mean, I, I, again, just a happy sort of coincidence of a lot of different topics that I happen to be very, very interested in that are all sort of encapsulated within valve. So, yeah, it's a, it's a, it's a great topic. I mean, I think they're, they're consistently 1 of the most interesting companies that are out there. And as you say, they absolutely do hire economists. So, although, I mean, based on what little we know, based on the job posting, they do seem to be on sort of the. the. The, the data science side of things presumably working,

Phillip Black: 50:11

we caught one of them. We, we, we actually talked to a live sample at one point.

Chris K-S: 50:15

get him on a, was he on a podcast or did we

Phillip Black: 50:18

No, no, he, we just chatted with them. I, I'd like to get us to that point. I think it's, you know, it's like Fort Knox over there. And there's like, not really that much that's scandally. It's like I help developers make their games better. It's basically kind of consulting for some of the economists.

Chris K-S: 50:34

The the valve paper. Matt, would you mind, I don't know, what was the paper about? A quick abstract.

Matt McCaffrey: 50:41

sure. So this relates to some issues that I think you guys discussed a few episodes back with Peter Klein, when you're talking about organization. And the paper that I co authored with a friend of mine was about Valve's organizational structure and the economics behind it and also, to some extent, how it has influenced their production of games or lack thereof. And so we look at a variety of different, you know, we look at basically as much of the available evidence as we could find, as we could sort of piece together from from what, you Different employees and things like that have said in the past to look at how it works, what the, what the pros are, what the cons are and things like that. And 1 of the things that we ended up concluding is that we have a little, it's almost like a little case study at the end of of. Half Life 3 slash Half Life Alyx and this question of, you know, was Valve actually ever going to produce another game when we started actually when we started writing the paper, they hadn't produced anything in years and then sort of at the last minute when we were in the editing stage. Out of nowhere, they say, oh, yes, by the way, we're dropping a new Half Life VR game in a month. So so we were able to add that, incorporate that in the end, along with a lot of other, like, sort of internal discussions in Valve that are, that are publicly available, that talk about the pros and cons of their very boss less system, you know, their allegedly no hierarchy system. And one of the things that we concluded was that, you know, I mean, it's it's pretty clear because a lot of employees current and past at valve have explicitly said this, that. It's the lack of hierarchical control and the lack of bosses that has contributed massively to Valve's inability to produce and successfully ship games over the past 10 or 12 years or so. So, you know, there's, there's a lot of sort of evidence in the form of, you know, testimony of big people in the company to say that this is one of the main causes of the problem. Now, from a broader sort of economic perspective. That might not be the worst thing in the world, right? It might, it's not great from a gamer's perspective because you're not getting any new games, but obviously from the company's perspective, it has obviously been quite financially successful and these still got steam, which continues to be a money printing machine. And, you know, they're in all kinds of hardware and I mean, there's, you know, there's so much going on at the company. So despite the fact that they have not. been a game developer, really, for quite some time. Obviously, they're still quite financially successful, and they're good at what they're doing. And that's, again, you know, contributes to the, the inertia within the company, and the lack of a desire, or the lack of ability to create new games.

Chris K-S: 53:33

Well, it's interesting is Peter Klein said there was an there was an implicit or an implied hierarchy within the company, even though they say that they're, you know, flat, there are bosses there are, you know, it's more of a kind of like a, a crime organization organizational structure than like you know, it's like well, maybe not anymore. I guess like I was, I was watching better call Saul. Those organizations are pretty Structured, but like, you know, like a, a more Wild West type of an organization,

Phillip Black: 54:02

Spontaneous order, baby,

Matt McCaffrey: 54:03

yeah, it's, it's a, it's a more informal structure, but it's still a structure. And I mean, I think a lot of people have compared it to a high school with clicks and there's popular kids and popular projects. And then there's people who are kind of on the outside, and you have to spend a lot of time navigating the internal politics of all of the different teams. And you know, sometimes it's projects are. Inspired and led not so much by a real need, or even by a particularly great idea, but simply by the force of personalities of the people who become the implicit bosses of the different groups. So, you know, there's a variety of people who have made these kind of criticisms of the company and said. Look on paper, it's all flat and nobody's your boss, blah, blah, blah. But the reality of it is that there are implicit bosses going right up to people like Gabe Newell at the top who, you know, I think the the valve employee manual says you know, and Valve, nobody's your boss, but Gabe's more not your boss than other people, you know and ultimately he obviously does have influence and control in the company and can, if he wants, if he's not busy on his boat in New Zealand or whatever he's doing, he can come in and say, look, you're fired, you're fired, you're fired, this project's canceled, we're funding this other project way more and so on, you know, so, so there is a very real authority there, even if it's not there on paper.

Phillip Black: 55:36

So if, if that's the case, so I would just say, I don't think this take is age 12. I'll give you guys flack on this one. And the reason I give you guys flack is because we had a bleak during the class action lawsuit that valve is facing. I believe it's over refunds where it leaked that they had 336 developers on games. And so that is astonishing low for AAA. Game developer size. So like, if you look at call of duty, 3000, 5, 000 employees, when you think about all the outsourcers and studios involved, and so you're telling me that 336 employees, they can service Counter Strike, Counter Strike, CSGO, Counter Strike, CSGO2, Dota. Some Team Fortress 2 updates, the Valve platform, all the other Valve initiatives, although they might fall under some separate headcount. In addition, remember they launched Artifact, which didn't work out. They launched the VR game, and they have Deadlock, which is in testing right now. Like, when I think about quantity divided by headcount, that is far and away better than pretty much every other developer I can think of. That I, that I even know of, like, it seems like they're an incredibly productive firm. Like I, I think, I don't think people have, have broken it down on a per unit basis. And that's why we're judging valve so harshly. Like they've, they are shipping products. Some of it just isn't sticking.

Matt McCaffrey: 56:48

Think to some extent that's, that's absolutely fair. But also I think that there's a There's another aspect to this as well, which is that I, I think the, the criticism of, of Valve isn't so much that they're not, that they, they're not trying to make games. It's that they're trying to do way too much with too few resources with the result that they they con, they're constantly, I mean, that's what the, the story behind Halflife Alex was, is that they were very, they were constantly, constantly trying to make Halflife games and other games. It's just that they weren't getting off the ground. They weren't getting any traction because it's so difficult to organize people when you're not formally allowed to organize people. And so it was just a constant series of false starts for them. So, You know, with that in mind, and you're right, I mean, it is impressive that they do so much with so few employees. And that in turn, I think, has to do with the fact that I think the company is intentionally kept. relatively small much, much, obviously much, much smaller than any of Valve's major competitors. And that in turn, I think, comes back to an organizational issue, which is that these kind of flat companies, they seem to they, they seem to have a lot of trouble scaling they, it seems to be very difficult to get them up over more than, say, a few hundred employees without either changing the company radically, spinning it off, bringing the hierarchy back in or whatever. So I think that this is, has been a conscious choice on valves part. I think that people like Newell at the top, they value the, the lack of hierarchy. Even if it is just on paper, they value that, they value the philosophy more than they value the idea that we are Valve and we are, we, and we make games, right? It's, I think they're more important to keep the philosophy and be this jack of all trades company that's doing all kinds of different stuff. So, I, I think that's their, their sort of rationale for, for why they do it. But, again, to your point, I think it's entirely fair to say that, given they have so many players, A few people in a way, it's kind of impressive that they produced you know, produced several games at the same time, I think most studios, you know, if you look at it from the perspective of, say, I don't know, releases per year or something like that I think, I think they're, you could still say that, you know, they're, they're, they're lagging behind, so as well as when you think of it in terms of the number of sort of aborted projects that they've had over the past 15 years.

Chris K-S: 59:20

It's a chicken and egg thing. Why is valve not growing? You know, they probably could. And if they had a different CEO at the helm, they probably would. So it's a really interesting thing because it is a conscious choice not to scale. And then you ask, okay, are they not scaling? Because, Their business wouldn't work if they scaled or are they incapable of scaling? You know, for some other, sorry, are they not scaling? Because the, the, the, the CEO says we don't want to scale. And it would be really interesting. I think a good experiment will be. Once Gabe does leave, what happens? Once they have somebody else at the helm what do they end up doing? Because I think at this point, you look at Valve and you look at something like Microsoft, you know, Microsoft maybe Microsoft's not the best example, or Xbox is maybe a better example. You know they went in a completely different direction where they were like, we're gonna grow, grow, grow, grow, grow, until we are, you know, producing video games. So yeah, it's really interesting Thing that I think we'll, we won't probably know the answer to and for another 20 years or so, but yeah, I've been speaking of ginormous platforms that scale. Didn't we already talk about blocks fruit? I have this in the notes but I thought I already talked about blocks fruit.

Phillip Black: 1:00:28

Tell us more. Tell us more,

Chris K-S: 1:00:29

last episode? Well, it's

Phillip Black: 1:00:31

Tell us, about your, your Roblox journey.

Chris K-S: 1:00:34

My Roblox journey,

Phillip Black: 1:00:36

Cause Matt's going to have to play co op with his kids. He's got to figure out what he's, what he's up against.

Chris K-S: 1:00:39

Hey, you gotta

Matt McCaffrey: 1:00:40

my big battle as a parent right now is preventing my kids from having any access to Roblox whatsoever. It's their,

Phillip Black: 1:00:49

Whoa. Whoa! Talk about hypocrisy. He should use this podcast as evidence against you or she,

Matt McCaffrey: 1:00:56

yeah. There's all kinds of stuff I'm absolutely happy for them to play, but yeah, I don't know, I just, I can't do it with the, with the Roblox or, or any of

Chris K-S: 1:01:06

Is it the,

Matt McCaffrey: 1:01:07

of, you know.

Chris K-S: 1:01:08

is it the monetization or, or what's the, what's the, I get this a lot and I'm kind of curious what people, I think there's a really negative perception about it. And I'm curious what, what, what

Matt McCaffrey: 1:01:18

It's actually not about monetization at all. To be honest, if anything, it's more about, uh, sort of basic kid safety stuff, you know, the difficulty of monitoring what they're doing, who they're chatting to and things like this. It's just, this is 1 of those areas where I, I actually do think that there's you know, some potential potential issues. You know some, you know, some very significant threats to kids in terms of the kind of stuff that they eventually can access. And it's just, it's very, very difficult to monitor that as a parent, at least from from my experience. So, you know,

Chris K-S: 1:01:52

much more on the safety side of

Matt McCaffrey: 1:01:54

yes, exactly. Exactly.

Chris K-S: 1:01:56

So that's interesting because that's an easy problem to solve for Roblox, right? They can just like they can have parental controls. That's password protected. And it says, hey you can't access. And in fact, they have some level of this. It's not, I don't think it's quite as far as like chat no longer works and you have

Phillip Black: 1:02:12

does. That's an, that's a very important thing to have. You can, you can set up chat controls on

Chris K-S: 1:02:17

It's a relatively recent relatively recent evolution, though, I think it's only within the last two or three years that they've, they've started to implement some of these safety features, but, you know, I, I, I think when we, we actually talked about Roblox, a couple of episodes ago, maybe the last episode it's been at least a month or two since we recorded Phil. So it's been a while, but You know, one of the things that I, that I talked about in that episode was just, I think the lack of categorical categorization in, in the, in the platform, the inability to search by genre, the inability to search by feature, the inability to, to search by safety, by, you know by age group, you know, just like I wanna, I wanna have a lot more. I want a much more curated experience versus right now. What is a very fire hose type of experience? Like, here is everything that we could ever imagine. And there's like this, you know, soft algorithm. The background is kind of working to suggest certain, you know, experiences to players. So I think it's a very reasonable very reasonable criticism. My primary criticism, actually. And. Why I was surprised that, you know, it wasn't monetization, I, you know, I think some of these experiences you jump into and it's just like, you know, buy this, buy that, get a subscription, go premium. It's just like, holy crap. Like, I just want to like, play an experience and I'm being overwhelmed with this. So certainly a long, a long way to go. Bloxfruit, I think is a, it's a better example of a game that's a little bit more. It's a very popular one, and that's probably why it's a little better of an experience in terms of jumping in, you mostly just running around, you're getting items. There's a shop, but it's not really like pushed to you. It's a super successful game. So obviously they have managed to monetize it. But yeah, no, it's just I think I'm not a Roblox gamer, but I think it's such an important platform for our industry that I try to like, I try to get involved in it and I try to play, play the different experiences and get, get a sense of what they're doing because I think Roblox is a trendsetter right now. And you know, it's, it's, interesting, they're trendsetting monetization and growth strategy while we are still trendsetting what's a good game. And I think that there's, there's going to be some give and take on both sides in Roblox, trying to allow their developers to make better games and also. Us learning from, from their their monetization techniques and how they have scaled their organization. No, no great games, Phil. I want to, I want to point out this book I've been reading, though, because Matt also wrote a book about, or an article on the economy of Westeros, I think, or the economy of,

Phillip Black: 1:04:53

Yes, this is a great transition. We got to talk about this

Chris K-S: 1:04:56

So, so I, I really want to dig into that. I, I've been, I, I, Matt, I, I've been reading Brandon Sanderson series called Mistborn. I don't know if you're familiar with Sanderson's work at all.

Matt McCaffrey: 1:05:06

I know the I know his work a bit. And in fact my 1 of my younger brothers knows him. My, my cousins, like, been over to his house and stuff like that. It's like, yeah, yeah, it's like, I come from a big sort of fantasy family. So, yeah, so I, I haven't read miss born myself, but everyone tells me it's the most amazing series ever.

Chris K-S: 1:05:25

It's, it's a fantastic series. It's only three books. Each book is about 600 pages. So, a much more digestible novel than, or, or series than, like, the Stormlight Archive. Each one of those is 1200 pages, and there's plenty of content. 10 of them or 10 planned. So I I've been enjoying it quite a bit. I'm digging, digging into that different writing style. If you're not super familiar with Sanderson, his, his style is very casual. It's very accessible and that's, he, he, he has made it evident that that's what he likes to write. He wants to write something that's more accessible. You'll like this bill, you know, it's more you know, It reaches a larger audience and it's why he's the most wildly successful fantasy author of all time. It's because he's just, he's able to access player, people, readers who would maybe otherwise not have read his books. You know, something like A Lord of the Rings is going to be a lot more chunky and difficult to get through for a casual reader versus, you know, Sanders stuff, which is really accessible. So I just thought you'd appreciate that, Matt. I've been chugging through that over the holiday. I'm really enjoying

Matt McCaffrey: 1:06:27

Yeah, again, as I said he seems to be the guy in, in fantasy at the moment. So I mean, it's, it's, and it's pretty clear that they, you know, mean, there's a reason why they chose him to complete Robert Jordan's Unfinished Wheel of Time and things like that. It's, you know, just, he seems to really get it. And as you say, it's just, he seems to be very accessible.

Chris K-S: 1:06:48

Next time you head over to his house, you know, let me know. I'll meet you guys there. We can, we can

Matt McCaffrey: 1:06:52

Yeah, no, I've never been there. But but yeah, no, I had some family members. They, I guess they were really into him. You know, like, in the, in the early days through wheel of time stuff and so they met him at cons and I don't know ended up somehow, like, becoming acquaintances or with with him. But but again, that's not that's I'm not going to do the, the the, the stolen honor thing. Cause that's that's that wasn't me.

Chris K-S: 1:07:17

So, so obviously you love fantasy. You come from a fantasy background. You you've probably the only person I know who's written an academic paper about a fantasy world. I'm trying to think of anybody else. I would love to, I would love to

Phillip Black: 1:07:31

Castronova, in some way? I don't know, like,

Chris K-S: 1:07:33

that's true. That is true. But, but that was like, pretty, you know, talking about the economy of a video game that exists. You know, it's an economy. One could measure versus Westeros, which is pure fantasy.

Phillip Black: 1:07:44

he talks about Second Life. He, like, goes into, like, you know, kind of almost like the like, almost like an anthropologist might go into, like, oh, look at the safari. Look at, look at how the, look at how the, the economist man interacts in the virtual world. They're downward sloping demand curves.

Matt McCaffrey: 1:07:59

and ever quest and yeah.

Phillip Black: 1:08:02

economic man responds to incentives in the digital world. You know, observe.

Chris K-S: 1:08:06

in, in Second Life are real people and the individuals in Westeros are, are fantasy people. So but I, I, I, I hear your point, Phil, Matt, I'm super curious. Why pollute? Why? What, what drove you to write this political science paper about Westeros?

Phillip Black: 1:08:22

And hold on, it is called We Do Not Sow the Economics and Politics of A Song of Fire and Ice. We'll link it out in the podcast description, as well as your loop box paper. I just wanted to show that

Matt McCaffrey: 1:08:31

Well, thank you for that. Yeah, so, you know, this was a case where we, you know, I, I started watching Game of Thrones, the TV show and, you know, basically almost immediately picked up the books because I got to get more of this. And the, the more I read, I mean, the more struck I was by the fact that. In so many ways, the, the overall narrative, it's just so. Structured by a lot of very classic kinds of economic problems. And, I mean, the reason I think for this is because, I mean, it's, it's pretty clear now that George R. R. Martin has massively drawn on real historical cases, whether it's the War of the Roses or, you know other conflicts and things like that. And You know, so he, he, he, he knows his history, I think, to, you know, to to a big extent. So he was able to draw on real historical details about things like how public finances worked and, and, you know, and sort of weave those into his narratives. And so, as I started to read his books in particular, I was really struck by that. And I thought, okay, well, I gotta. I gotta get some mileage out of this, you know, let's let's let's talk about it. So that was absolutely, it was a lot of fun to to research and to write and to, you know, pour over all the different books and try and, you know, you know, for, for little you know, little points, little arguments and things like that. Because also I do think he's a, he, I think he's, you know, a pretty talented writer as well. And so it's not just that he has the right details, but also he expresses them in I think. Very often, a rather eloquent way as well. So that also makes it so much more so much easier. And it was just a lot of fun to mine those books for the little economic history insights.

Chris K-S: 1:10:17

And it's published, right? You got it published in a journal?

Matt McCaffrey: 1:10:20

Yes, it's it's a book chapter. It's part of a larger collection by a variety of scholars who were all contributing basically essays on the economic aspects of all different kinds of sort of pop culture media, whether it's novels or plays or what have you. So yes, there's a lot of different a lot of chapters on Atlas shrugged in that book so I hope we wanted to do something a little different.

Chris K-S: 1:10:45

There's a lot of content to pull on, you know, it's a long book. You know, it's beyond a passion project, you know, it's beyond, it goes beyond oh, this is something I'm really interested in you know, there's, there's value in putting this out there. I guess, what would you, what would your like academic economists take be, if you had to put on your economist hat, like on why it's important for this type of stuff to be written? Why is this article important? And you know, 30 years from now, when somebody reads that article, what's the value add there?

Matt McCaffrey: 1:11:14

Broadly speaking, I would say these kinds of things are important because they are a part of the sort of mission of the public teaching of economics. This is something that, you know, basically outside of, you know, within academia Really is not something that is particularly highly valued. Again, the incentives of most academic economists are to do academic work and the general public and the public teaching of economics is just not a priority. For most academic economists, because you can't publish in the top journals with that kind of stuff, just for example. So, but at the same time, the public teaching of economics is absolutely crucial because, everybody thinks that their discipline is really important, but economics actually is really important. And the more, the more people know about it the better informed they are, the better citizens they are, if you will, you know, the better decisions they'll make in the voting booth or, or whatever it might be.

Chris K-S: 1:12:13

is the type of stuff that kids take a class to know. Oh, I'm going to take econ one on one with, with Matt you know, Dr McCaffrey because he's, he's written this paper about, you know, valve or he's written this paper about Westros. Like, that's really interesting. It gets people involved in economics that otherwise wouldn't

Matt McCaffrey: 1:12:29

Exactly, exactly. I mean, there's just so much to be said for, for just the power of showing people that economics does not have to be this unbelievably dry, technical. Social science, you know, it's fun. It's exciting and it's absolutely applicable to the real world. And again, there's a kind of an irony there because, you know, Westeros is very much not the real world, but it has very real world lessons. And I think those are lessons that. You know, readers can can very easily pick up if you just kind of point them in the right direction a little bit. So, you know, I think it's incredibly important to use these kinds of materials to teach basic economic principles, because most other people don't have an accessible way into a topic like this, because, you know, at most, most, people take, you say, they take principles of microeconomics at college because they have to, because they're required to, and they don't really like it. And they never really think about economics for the rest of their lives because of that

Chris K-S: 1:13:28

The most fantasy they get is this guy called Robinson Crusoe. That's like the, the only story they

Matt McCaffrey: 1:13:34

Yeah. But but, you know, there's just there's so many ways into economics as a social science and that that in turn, you know, Once you get in and once you start understanding the principles, it really just completely changes your worldview. You're never the same again. You start to see everything through through an economic lens. And I think that's great. I think that's, you know, something that. Many, Many, people would really benefit from. So again, it's just, this is just one example of a way into that kind of reasoning and it's a, that kind of, you know, public engagement,

Chris K-S: 1:14:10

Yeah. I think most people, especially college educated people, people have taken econ one on one will be able to identify economics within its own context. Hey, what happens when demand, you know, moves right, rightward or leftward? They can answer that question, but when you give them a real life, real world example, you say, what should you do in this case? Our price controls? Good. You know, is this is this minimum wage level a good thing or a bad thing for, you know, for for welfare? That's where their understanding breaks down. They're not able to apply the theory that they saw in class to practical situations in real life. I, I really like this idea. I had not even thought of that. You know, by. Exposing people to economics and the contexts that they experience in daily life. Well, maybe they don't experience, you know, the Westeros economy, but, you know, it's much more visceral. It's much more something I can really internalize.

Matt McCaffrey: 1:15:01

Stuff that people care about, you know because yes, you know, you can go with people into the supermarket and explain how supply and demand works. And yeah, that's something that they experience, but you know, Often I think it doesn't, that doesn't speak to people, right? Whereas these other things, they really are emotionally invested in, and the more they are, you know, the easier it is to start using them as examples and, you know, teaching materials and things like that.

Phillip Black: 1:15:25

So how do we look at A Song of Fire and Ice as an economic message that George R. R. Martin was trying to send, right? Because he can craft, he can say in a novel that demand curves slope upward, right? He can create a reality. That is different from our own. And so we're always trying to impose this reality onto it. Like I remember there was this economic calculation of the death star, like how much the death star would cost. It's hard for me to imagine that that cost is operating in a normal world or like they're operating as like rational agents or like any of our theories would hold up. There's this famous idea of like plot armor. I don't know. Is that really economical? Is that, you know, like there's a lot of. There's a lot of golden fist rather than, you know you know, the you know, hand moving, moving here. So what, what is George RR Martin trying to say, you think?

Matt McCaffrey: 1:16:04

Well, I think because he Takes this sort of because he has all of these historical influences. I think that guides his narrative. And it's really hard to say, actually, to what extent he kind of consciously recognizes the sort of economic principles that that he's illustrating, but a lot of what he has to has to say is about The economic basis of life and the importance of economic issues in determining, you know, ultimately, these very grand political. Games of thrones and things like that. You know, at their basis, there are a lot of very fundamental economic problems that drive all of these things. They again, it might not be the whole story that you might. It's not pure economics necessarily because you got dragons and these other things that don't really fit the the economic metaphor and so

Phillip Black: 1:17:01

play with me, play with me for a second here,

Matt McCaffrey: 1:17:03

it's important. Yeah,

Phillip Black: 1:17:04

but, but, but, but play with me here for a second. If we were to, like, think about the White Walkers, and this is a question from Eric, one of our co hosts, that was a really sharp question. Like, how would we think about the White Walkers in terms of an economic theory? And he's suggesting. Potentially, it's a collective action problem that Martin is illustrating. Like, they all really like the thing that is constantly made aware that we're made aware of is like, this threatens the entire world. You know, is this is this our global warming and are the dragons the nukes? Like, these are the analogies that are always being made. You think those are accurate?

Matt McCaffrey: 1:17:33

probably. Yes. I mean, I would suspect that. The White Walkers, I mean, people have talked about them as things like a metaphor for climate change and things like that. Actually, it's not even really a metaphor. It's like literal climate change, basically, but probably in the 90s when Martin thought that up, it probably seemed like a lot. more clever and metaphorical than it does in the 21st century when it's the big issue around which everything else revolves, you know? But so, you know, I think there's some, some pretty easy metaphors that you can apply to these kinds of things. But again, it's a little strange because if it is, I'm not sure it's, it, the metaphor says what Martin maybe wants it to say, because for example, when you think of it as like I'm not sure it works, actually, for instance, as like a collective action problem, because people do act collectively to stop the White Walkers. I mean, I think the problem in the early books is that or the early seasons of the TV show is that people are either unaware of the threat, or they assume that it's, A mistake or as part of somebody else's plot, you know, it's it's just you know, it's a, a deception or something like that. But I think once people do figure out that there's a big threat, they do collectively act and you have most of the big powers in Westeros coming together to fight them. But that's also kind of a problem for the metaphor, because they completely fail, even when they act collectively. And ultimately, the thing is stopped by 1, Person, you know, basically Arya Stark swoops in at the last minute and and kills the Night King and then that, that's over and done with. But the collective action of everybody else, including all these dragons and things like that, that ultimately didn't do anything. So, it's just, it's weird because I don't know if that's what the metaphor is supposed to be because it leads you to some kind of weird conclusions. Now, at the same time, I will say, maybe this is not what Martin has in mind. And maybe, for instance, in the books. He's going to have a completely different kind of ending that might better fit that, that sort of narrative that I can't say, but I do think it's I do think there are some limitations to some of these interpretations. And yeah.

Phillip Black: 1:19:51

So, the 2 papers we talked about today are the 1st 1 being on loot boxes. You did a literature review. The 2nd was we do not. So, the economics of politics, a song of ice and fire. What are you working on these days?

Matt McCaffrey: 1:20:04

Well, I have a few different things. One that is related to the topics that we've talking about is I have another paper, another book chapter coming out coauthored with the same economist that wrote the paper. Ice and fire paper with and that is on economic principles in modern sci fi TV. So we get to talk a little bit, you know, a little Star Wars, a little Star Trek and the utopian aspects of TNG. But also some other great shows. That I love, you know, some popular, some not the, the newer Battlestar Galactica and Andor and a lot, you know, a bit of a bit of Firefly, of course, because you can't you know, you can't write this kind of paper without talking about that as well as The Expanse and, and a few others in addition, so, and that's kind of along the same themes as the Ice and Fire paper, is the talking about how these kinds of shows do such a good job of dramatizing what are actually Human beings solving very basic economic problems or trying to so we got that coming out. And I'm I have a variety of other things that I have to sort of work on. Not all of them are sort of related to what we talked about today. But I'm hoping to have a paper this year on loot box regulation to examine the case for regulating loot boxes and see. If it's good, if it's bad and that sort of thing, evaluating some of the different policy proposals that have been made. And for the most part, I stick to what is supposed to be my main topic, which is entrepreneurship and that's the sort of big umbrella topic that I do most of my work in and that's or at least that's what they, that's what they pay me for. So, but but that a lot of that is maybe a little further afield, some compared to some of the stuff we talked about today.

Phillip Black: 1:21:50

Our guest today has been Dr. McCaffrey and we can find you on Twitter.

Matt McCaffrey: 1:21:54

I.

Phillip Black: 1:21:55

to find you?

Matt McCaffrey: 1:21:56

I think Twitter is probably the best place. Yeah. So yeah, look me up. Matt C McCaffrey, I think is my handle at the moment. I'm not the most active person on the site, but but I, I do tweet from time to time. So yeah, by all means, give me a follow and I'll, I'll, I'll even follow you back. How's that for a deal?

Phillip Black: 1:22:14

That sounds great. Thank you so much for being here. We appreciate

Matt McCaffrey: 1:22:16

Yeah. Well, thank you so much for having me. it. was a great conversation.