With the recent set of turmoil that has engulfed markets all around the world, I can't help but think of it as a game. At the moment the banks are all in trouble, the levels of trust in markets at an all time low. It is, in essence, a game of poker that has gone bad, and many people are taking their stakes and going home. There's a lot of culture of blame going on, with various groups and politicians calling for curbs on pay packets to executives and the like, which I tend to think is basic scapegoating when the actual problem is that the rules of the market game were poor and lacked balance.
Investment banking, indeed any kind of financial business, is really just a game. There are rules to adhere to, diplomatic phases to engage with, trades to be done and so on. The reward for playing the game well is money of course, but after a certain level most investment bankers would agree that the money that they get is really just points. The rules of the game allow for a vast accumulation of points, reinvesting of points to build even more points, complex deals based on the promise of the transfer of points etc etc. It's just a big MMO.
What happens with any game of any sort is that players instinctively try to exploit it. Grokking, as it's generally called, pretty much demands this sort of behaviour. To be a great player, you have to learn now only how to play but also how to play well, and what the limits of the system are. An example of this is rocket-jumping in Quake, or the road-rail cheat in Transport Tycoon. All game systems have unintended emergent behaviours and the more complex the system becomes, the more opportunities for exploits become available.
Exploits, it should be noted, are different from actual cheats. A cheat is where the player uses some outside influence to artificially alter the system (such as looking at your opponent's cards). An exploit, however, is legal within the system even though many players may not consider it sportsmanlike behaviour.
The current financial crisis is essentially the result of two things:
1. Poor rule design in the game of the markets.
2. A proliferation of exploits gone bad
Rule design
The key rule design that has been flawed is that of the complex derivative and credit swaps market. In short, the intergovernmental system had adopted a highly free market approach to all business as much as was possible over the last 30 years (pretty much since the 80s) which had had good effects in liberating a lot of credit but also had bad effects in limiting monitoring and oversight. While free markets sounded good in principle, in actuality they drove the complexity of transactions. It has been said a lot in recent days that the core of the problems really stem from most of the players having a very poor understanding of the transactions to which they were committed. A whole vast industry had arisen on the basis of this exceeding complexity to the point that pretty much nobody knew what anything was worth any more and everybody believed that everything was secure until they realised that it wasn't.
Exploits
So what about those exploits? Well transactional complexity figures largely here because they essentially allowed the players to inflate their value in the absence of a clear sense of worth. Secondly in many countries the relationship between players and rule-makers was too close. Financial institutions (being as they are players) are motivated to want to collect as many points as possible and so they lobby for changes to the rules of the game in order to get those points. This is not dissimilar to high-level long-time players whining about their characters in WoW to Blizzarrd in the hopes of getting some advantage for themselves.
So since lobbying is legal, it has been an oft-used exploit. Another is the practise of creating new kinds of financial product at a rate much faster than the hobbled government can catch up to and examine them. When you have a mortgage market with hundreds of thousands of separate "products" (meaning deals) in it offering all sorts it seems that our political structures simply cannot react fast enough to them. The same thinking applies all across the credit market, and led to some real limiting-inducing types of product such as a the 110% mortgage with no deposit. Nobody seemed to understand why this is a bad idea any more because of the exploits involved.
Blame?
The failure here is therefore political. Unlike the players in the market, it is ultimately governments that set the rules of the game. You can always assume that a player will play a game with such high stakes in an unfair manner if they can (because that's how it is in the top leagues) so the real fall-down is not with the players who simply played, it's with the politicians who either didn't understand what they were doing or didn't see the consequences, or convinced themselves that they couldn't govern. Non-governing government is a central theme in all of this, and it explains how they were caught so flat-footed.
Simply put, politicians of all stripes over the last 30 years have slowly relented from their responsibilities in government. This too is for reasons of a game: while a government controls so much of a bureaucracy or a series of departments it is vulnerable to attacks or even downfall from those avenues. This means a government running road, rail, postal services, schools, military, police and so on can potentially take a lot of heat - especially in an age of 24-hour news.
So their natural inclination has been to get as many of these concerns off their books as possible. Privatisation benefits the government because it makes headaches over the rail system someone else's problem. Extreme liberalisation of markets benefits the government because it gives them a convenient set of targets when everything is going to hell. And so on.
Sometimes it's good to liberalise, sometimes it isn't. In so doing to an extreme degree, the governments of the west have essentially been allowing the exploits to multiply for a long time. They have also been retreating ever further away from their essential role of the rule-maker, but it is still a role that they have.
Moving Forward: Digital Nation
This is where we, the game developers, can make a difference. The real issues of complex systems and exploit management are our bread and butter. We make games for a living, some of them very complex. We model systems and simulations on a more or less constant basis and we do so from the position of experts both in systems and in player behaviour. If you accept that markets are essentially driven by game thinking, then who is better placed to come up with innovative solutions that we?
More importantly if we are also going to prevent this sort of catastrophe from happening again, who is better placed to help modelling a new form of digital governance than we? Politicians don't seem to have the tools at their disposal to make informed decisions any more or really see the results of what they are deciding, but we can. We can make systems that model the entire development of a civilisation if we put our minds to it. We are the professional systems makers, simulationists and gamers.
So, when looking at the latest series of rises and falls on Wall Street and the latest ever more listless cash injections being used to try and preven further meltdown, think of it like this: What you're seeing is a badly designed game in operation being managed by people who don't have a firm grasp of it because of its complexity and who are really just hoping not to get the blame. We can do better than this, and we should.
Particleblog's comments have moved to The Play Room.
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