Theory Meets Practice Online

Researchers and academics are looking to online worlds such as Second Life to shed new light on old economic questions

by Francesca Di Meglio

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For those who think that online worlds created in venues such as Second Life and online games such as World of Warcraft are just fun and games, think again. Business school professors and economics researchers are turning to these virtual worlds as dynamic laboratories to shed light on some of the venerable mysteries of economic behavior.

As proof, all you needed was to crowd into a packed conference room in Second Life earlier this month for a panel discussion on the evolution of stock exchanges, the role of regulation, and other issues facing this new economy. The panel was hosted by Cornell B-school professor Robert Bloomfield, whose real-world specialty is using lab experiments and mathematical models to study the effects of financial market regulation on investor welfare and how psychological forces affect financial markets.

Running Complex Experiments Online

"There are futurists who believe that Second Life or some other virtual world will be the future of the Web," says Bloomfield, who inhabits Second Life through an avatar aptly named Beyers Sellers. "My goal is to use virtual worlds as a way to teach students about real-world business."

In fact, many economics researchers, including Bloomfield, professor of accounting at Cornell's Johnson Graduate School of Management, are using the virtual environment to test ideas involving staples of economics such as game theory, the effects of regulation, and issues involving money. Since 1989, Bloomfield has been running experiments in the lab in which he creates small game economies to study narrow issues. But when the Financial Accounting Standards Board recently approached Bloomfield about studying how to create financial accounting standards that will assist investors as much as possible, he quickly turned to the virtual world for answers.

"It would be very difficult to look at the complex issues that FASB is trying to address with eight people in a laboratory playing a very simple economic game," he says. "I started looking for how I could create a more realistic economy with more players dealing with a high degree of complexity. It didn't take me long to realize that people in virtual worlds are already doing just that."

A Lab for Regulatory Policy

Bloomfield points out that today's virtual economies are very much like the U.S. economy about 100 years ago, when there was no regulation whatsoever. That makes this other realm ripe for study. "Virtual worlds like Second Life give students an opportunity to understand what the purpose of regulation is, why it arises, what forces drive it to look ultimately the way it does," says Bloomfield.

At Indiana University, researcher Edward Castronova has posed the idea of creating multiple virtual economies to study the effects of different regulatory policies. At Indiana, Castronova is director of the Synthethic Worlds Initiative, a research center to study virtual worlds. "The opportunity is to conduct controlled research experiments at the level of all society, something social scientists have never been able to do before," the center's Web site notes (see BusinessWeek.com, 5/1/06, "Virtual World, Virtual Economies").

A virtual stock market is certainly not the only online entity that opens itself up to research. Marketers are already using the virtual world to test campaigns, packaging, and consumer satisfaction. Pepsi (PEP) famously tracks use of its products in There.com. Architects seek reaction to design. Starwood Hotels (HOT) test-marketed its new loft designs in Second Life (see BusinessWeek.com, 8/23/06, "Starwood Hotels Explore Second Life First").

Market Research

Avatars also need a place to live, so the virtual worlds offer insight into real estate trends.