Unpredictability in Nature, Unpredictability in Economics Amanda Sestito and Sudarshan Gopaladesikan IntroductionNeed for this Research Research on the

existence of unpredictability in economics is vast and currently on going. As academics are starting to understand that economics is unpredictable, barely any research has been done on the fastly growing trend of virtual economics. As the interest in virtual economies grows, the research into the eects of unpredictability will be needed. This is because we argue that virtual economies need to be unpredictable. Our paper aims to provide the foundation upon which our claim will be considered true. This research is critical to future success because no other research has been done like this. Virtual economies are economies in a virtual enviornment, ultimately driven by humans. Since there is a coexistence of an economys environment and human behavior, there is bound to be existence of unpredictability. We attribute the unpredictability to the fact that both the economic system and human behavior are in itself unpredictable. If these claims are found true, then the exploration of virtual economies in B2C, B2B, and B2E environments, mathematical models of virtual economies, and eciences in virtual economies can be found worthwhile. But, rst we prove that unpredictability exists in dynamical systems like nature and that humans are unpredictable. Transitioning the scope of our research to economics, we explore the unpredictable characteristics of an economy. By proving inherent sources of unpredictability exist in any virtual economy, we can claim that a virtual economy always needs to be unpredictable. This will help us expand our research into other areas of interest.

Denitions Before we even explore the existence of unpredictability, we must rst establish a working denition of unpredictability. As we will use this denition constantly throughout the paper, the initial denition will be general. However, as we explore unpredictability in dierent disciplines, we will derive a specic denition from our general one. With that said, predictability is the degree to which a correct prediction or forecast of a systems state can be made either qualitatively or quantitatively. Therefore, unpredictability is when the degree of predictability is 0.

Mathematics of the Unpredictability of Nature The unpredictability of nature can be found through many examples with natural disasters being one of the most notable events. Regardless of the examples, we want to be able to prove that mere existence of nature brings about the inherent existence 1

of unpredictability. Going one step further, nature can be explored as a non-linear dynamic system. If we can prove that all non-linear dynamic systems have unpredictable elements, then we can simply state that nature is unpredictable because it is a non-linear dynamic system. A dynamical system is a concept in mathematics where a function describes the time dependence of a point in geometrical space. In layman terms, a dynamical system is a composition of equations that describes events in relation to space and time. The evolution rule of a dynamical system is a function that allows someone to calcuate the next future state from the given current state. This implicitly says that dynamical systems are fundamentally deterministic. However, it can be seen through quantative and qualitiative results that dynamical systems can exhibit completely unpredictable behavior. The most general mathematical denition of a dynamical system iis a tuple (T, M, ) where T is a monoid, M is a set, and is a function where : U T M M . The intial condition is (0, x) = x and follows the rule (t2 , (t1 , x)) = (t1 +t2 , x) where t T . The function (t, x) is called the evolution function and it maps every point in the set M to a unique image depending on t T . The set M is better known as the state space with x being the initial state. Therefore, nature can be seen a general dynamical system because T is an open interval in the real numbers (set of all living organisms) living in a manifold M (Earth) under the constraint of a continuous function (inteactions/time). Simply put, nature is a dynamical system because it observes the state of living organisms on Earth given certain interactions over a period of time. Now that nature can be seen as a dynamical system, let us continue with the mathematical theory behind unpredictability in dynamical systems. We turn to Turing machines because they help us understand the computation and predictability of dynamical systems. A Turing machine is a nite-state machine moving left and right on a tape, on which is written a string of symbols in smoe nite alphabet (lets assume {0, 1} WLOG1 ). At each time step, the machine reads the symbol at its present position on the tape, and depending on that symbol and its internal state, it (assume S is some nite set of states): 1. changes its internal state (F1 : S {0, 1} S) 2. changes the symbol on the tape at that point (F2 : S {0, 1} {0, 1}) 3. moves one space left or right to its next position (F3 : S {0, 1} {+1, 1}. Adding dynamics to an internal state s S, the tape T {0, 1}Z , and the machines position i Z, we see that the set = S {0, 1}Z Z = {(s, T, i)} is the set of
1

without loss of generality

instantaneous descriptions. This can be viewed as the computation of a current state. In fact, mathematicians regard a given calculation as possible if a Turing machine can preform it. Following logic, we want to see that if we label some internal states s S as terminal states, is it possible for the Turing machine to calculate it in nite time? The answer is no. This in fact is known as the halting problem, and if this problem is solved, then all of mathematics would be easy. The mere fact that the halting problem is unsolvable goes to show that terminal states of dynamical systems are in fact unsolvable. Using fundamental principles from real analysis, there is a theorem that states a dynamical system is strongly unpredictable if and only if it has strongly uncomputable trajectories. With respect to nature, this means that we can never truly know what the future (or ending) states of nature will be because we cant compute it. It is known now that even if a system is deterministic it can be the case that we cant predict its behavior in the long run. If the behavior of a dynamical non linear system is not predictable, it is because initial conditions can lead to astray results. That would mean that we need to know initial conditions to innite precision, which is impossible to know. From the Turing machine example, we have also decied that no algorithm can tell if a Turing machine will stop or compute forever. The last mathematical relation we will make for dynamical systems is the concept of irreducibility. A computation is irreducible if it can not be sped up by taking short cuts. Formally speaking, the value of the nth step of a function f , namely f (n), can not be computed without having to follow the same path of calculating f (i) : i {1, n1}. Simply put, we cant know future states of a dynamical system until we know the previous state. In terms of nature and continuous time, it would be impossible to know the previous state to the innite degree of precision. From the generalization, we can conclude by using mathematics that dynamical systems are unpredictable and uncomputable in the long run. Its implications mean that systems such as nature and economics have future states that can never be predicted. Our mathematics are validated by the very own fact that the stock market is unpredictable, but we will touch upon that in greater detail later on in the paper. We now move from math to explore the unpredictable nature of dynamical systems in other elds of science.

Chaos Theory and Unpredictability Chaos theory stems from our mathematical discussion by stating that tiny variations in initial conditions can have major inuences on unfolding event with a system, especially in the long run. In 1961, Lorenz attempted to predict the behavior of weather through computerized weather experiments. However, the minute dierences caused by computer rounding errors caused random behavior that produced unpredictable results in dierent trajectories. From what we know about irreducibility, Lorenz conrms our claim by stating, any physical system that behaves non-

periodically is unpredictable. It is this unpredictable behavior in dynamical systems that presents a paradox in chaos theory. We stated earlier that dynamical systems are fundamentally deterministic because they follow deterministic laws. The interaction between unpredictability and deterministic leads to the emergence of chaos and order in a yin-yang type relationship. In relation with nature, it is near impossible to know the law and order of nature. With that said, the best we can do is to cleverly infer the consequences of those laws. This puts more focus on qualitative analysis when it comes to system state prediction. To tie this neatly with economics, capitalist economics is often criticized for its short-term focus. There are quarterly projections that are rarely met, and business leaders often nd themselves explaining what happened rather than accuractely predicting what will happen. Chaos theory claims that businesses will only truly succeed in a dynamic competitve environment if they made shorter projections and faster adjustments. This sounds a lot like the same thing that behavior engagement and gamication experts say about inuencing people. In dynamical systems such as nature and economics, constant feedback and evalution is needed if accuracy of projections is to increase. Since nature is a dynamical system, we can easily see that nature breeds the existence of unpredictability. However, the chaos in a dynamical system is paired with a certain order. This order is something that we as humans cant compute, but will have to learn how to infer and qualitatively describe. Remember our general denition of a dynamical system. The monoid T is an open set of all living organisms. Since humans interact in nature, we observe human interaction and behavior. Once we prove that humans are unpredictable, then we can show the inherent unpredictability of economics. After all, economics considers internal and external factors.

Human Interaction in Unpredictable Nature Before we can look at the unpredictability of humans, we must rst sharpen the focus of what we mean by humans interacting in nature. It is true that humans interact in nature. However, since our scope is ultimately economics, we want to look at human interaction in a civilization. Civilization itself is a dynamical system and can be studied in many levels. Network theory suggests that social interaction drives civilizations, but the unpredictability arises in the individual human interactions. If we take a look at the world, it is split up into many dierent countries. Each country has its own denition of success and wants to achieve it through certain means. These means may or may not interfere with other countries ideal of success. Because of that, treaties and wars are created. However, within a country, it can be further divided into communities. In each community, these people are connected because they share

the same ideals (political, economic, social, career, etc.). As there are various communities within one country, similar versions of treaties and wars can start. Relating this high level of social interaction to chaos theory, we see that world events are generally unpredictable because the initial conditions are constantly changing minutely or drastically. Regardless of the type of change, the change in initial conditions forces the worlds events to be ultimately unpredictable. This is important when talking about economics because interaction and information are two very important factors of economics.

Unpredictable Psychology Experiments Civilizations and communities are made up of humans, so it is important to explore the unpredictability of individual human behavior. The rst example we look at is the Milgram Experiment. This experiment looked at the inuence authority had on making ethical decisions. It tested a mans obedience and morality, and unpredictable behavior was exhibited. Pscyhologist Stanley Milgram set up an experiment where there was a learner and teacher. The teacher would ask the learner questions. For every wrong answer, the teacher would shock the learner by pressing a button. Unbeknowst to the teacher, it was just a tape recorder expressing cries and screams. Each shock increased by 15 V each time and ranged from 30-450 V. Milgrams peers believed that the cruel trial would only have a few subjects reach the 450 V mark. However, 26 out of 40 subjects went to the 450 V mark, even though they never knew the condition of the learner at any given point in the experiment. This unpredictable behavior hints towards research that could be done about obidence and morality in the B2E environment. This next experiment involves two buttons with a certain payout. Every 10 second, a light is ashed. When the light is ashed, the subject has to press a left or right button. If the right button is picked,the subject gets 5 dollars. Otherwise, the subject gets nothing. There are 120 trials of this game. The buttons are set up so that the left button is the right answer 70% of the time. In the beginning trials, the subject will try to learn the method that decides which is the right button. However, towards the end of the experiment, the subject will pick the left button 70% of the time and the right button 30% of the time. The subject should have just chosen the left button the entire time because that would maximize his winnings. The subject fell victim to a term called predictive matching. Our cognitive systems are designed to be unpredictable. On each trial of the game, there is only a probability that the subject will pick the right button. This implies that our brains are willing to pay a price in the short term in order to be unpredictable. One of the biggest reasons for this trade o to be unpredictable is the fact that life is not a simple game. We will explore opportunity costs and factors of decision making after we reference

more examples of human behavior. Although this research focused on education, its results can be applied to almost eld of research. The research concluded that complex human behavior of the type that interests researches is unpredictable due to individual dierences, chaos, evolution, free will of a human, and quantum mechanics. We have already exhausted chaos and evolution rule, so we look towards individual dierences, free will, and quantum mechanics. Humans are considered unique, but the use of cognitive neuroscience helps put this into perspective. It is estimated that the brain has 101 3 synapses. If we want to calculate the number of subsets in the power set of synapses, this states that some 21 01 3 possible states exist. This number is even bigger than the total number of elementary particles in the entire universe. We already claimed that nature was unpredictable. This proves that humans are not alike and that everyone will act in dierent behaviors. Newest studies in cognitive neuroscience claim that some irreducible level of randomness may be an essential feature of the vertebrate nervous system and ultimately plays a role in behavior. If the mechanism by which neuronal ring rates yield behavior can preserve a variable fraction of the neruonal stochasticity that we observe, then the level of unpredictablilty in behavior could be associated with this variability in the physical ring process. Further research needs to be done in this area, but it suggests that certain behavior is irreducibly unpredictable, and this unpredictability emerges from where synapses operate. Free will is an important aspect to unpredictability. If life was deterministic, it still would not matter. Since predicting future states is impossible, a deterministic life would still yield unpredictable behavior. Free will suggests that humans will act in logically indeterminant ways. As a precursor to quantum mechanics, observe an experiment carried about by MacKay (1967). If someone were to predict their wifes routine at 7:30AM, they would be able to predict the behavior to some accuracy. However, if we made the prediction known to the wife, the wife could simply do something else to prove the prediction wrong. This observers eect claims that someone can not produce a comlpete specication that will be equally accruate whether or not it is believed by the person being observed. Since a prediction can not be universally true, this brings about the emergence of free will. Finanlly, transitioning from observations to quantum randomness, we see an interesting result from the ring of electrons. When an individual electron is red, it hits a phosphor screen to determine where the electron hit. The interesting result is that even if an electron was red with the exact same specications as a previous ring, the ending location would be completely dierent than its previous ring. However, multiple rings allow scientists to develop probabilities for the various locations of an electron given certain initial conditions. The fundamentals of quantum randomness give evidence that identical physical situations give rise to dierent outcomes. It has been thoroughly examined that human behavior is unpredictable. The other two aspects of human behavior that need to be explored are reinforcement schedules (human rewards/punishments) and 6

psychology of opportunity costs.

Reinforcement Schedules Todays gamication systems and virtual economies mainly follow a positive reinforcement schedule. If someone does a desired action, they get rewarded. If they dont do anything, nothing happens. This is similar to the 70/30 experiment on predictive matching, and we have already stated that life is not a simple game of positive reinforcements. Just like the unpredictability of human behavior, reinforcements need to be unpredictable as well. Research done by Penn State University has found that variable ratio schedules are the best way to engage users. A variable ratio reinforcement schedule involves delivering reinforcement after an approximate number of times the target behavior is exhibited. This schedule is useful for beginning maintenance of a reasonable well-established behavior. For teaching new behavior and actions, continuous reinforcement is needed. However, once new actions become well-established, a variable schedule should take place as it increases participation and reduces extinction rates. A great example of a variable ratio schedule is the lottery. If you buy a ticket, there is a one in a million chance that you will win. Even if the chance was reduced to one in ten, there is no garauntee that you will win on the tenth time. Because this reward system isnt as determinate, users dont expect as much. People play the lottery a lot because the reward is so much greater than the cost of entry, and they understand that there is an undetermined point where winnings will be received. Because the rate of winning is undetermined, the learning curve for behavior is steeper than a continuous schedule of reinforcement, but it will generate loyal users over time. The frequency of interactions is high because of this since people will keep transacting until the reward is seen. Ultimately, the best part of the lottery and all variable ratio schedules is the decay rate. Take a look at slot machines. After the third coin you put in, you get two back. Two more and you get three back. Another ve coins and you receive two more back. How dicult is it to stop playing? Other examples include golf and sales bonuses. It only takes a few good shots for a player to keep player. If they cant gauge the accuracy of their shot, they will keep playing until a good one comes. Similar to door salesmen. Going door-to-door may not seem eective, but the salesman knows that more sales will come if s/he visits more houses. A gamied example is achieving a new level in an RPG. Some games dont give clear indicators of when a player will achieve a new level, which makes the player keep playing until the new level is reached. Referencing this to a virtual economy, variable ratio schedules will help create a network of individuals loyal to the economys rules.

Psychology of Decision Making 7

Before we conclude, it is important to talk about the psychology of decision making. As humans, we are supposed to maximize our choices, but external factors sometimes makes us choose alternative solutions. When making a decision, we tend to look at factors such as price, opportunity cost, and SAPS (status, access, power, and stu). We sometimes preform actions that will raise our status even if it comes at a costly price. We sometimes dont consider opportunity costs because we dont want to change our daily routines for an alternative solution. We often dont make rational choices because we are creatures of subjective experiences. Everyone rates experiences dierently, and everything is viewed subjectively based on the observers personality. As we saw before, there are a countably innite number of brain states associated with each behavior. These behaviors contribute to a persons personality. Since each personality is unique to the individual, our world is driven by subjective experiences. These subjective experiences ultimately give way to unpredictable measurements of expectations. These unpredictable measurements create irrational choices. Factoring this into economics, we can easily see that the notion of humans being rational is completely void because it has just been concluded that humans are unpredictable in social interaction, behavior, and decision making. By using math, cognitive neuroscience, quantum mechanics, and psychology, we are able to prove without question that unpredictability exists in nature and human life. As economics is created through internal and external factors, our study into nature and human behavior will help prove the unpredictability of economics. This is because economics is simply the study of how humans interact and behave with each other in an environment of scarce resources. Although our scope is ultimately economics, it should not be dismissed that unpredictability should be implemented in gamied systems. Further research in variable ratio schedules should take place, but the implementation of unpredictability would spark the creation of advanced gamication techniques. We hope that after proving the unpredictability of economics, we can combine gamication and economics to create successful unpredictable virtual economy environments such as B2E, B2B, and B2C. But rst, we prove the unpredictability of economics. Introducing Economic Unpredictability By claiming unpredictability exists in nature it follows that the economy, a function of nature, also inherits this unpredictability. This is critical to our research because it is important to try and translate the actual, real-world components of the economy to any virtual environment to provide a relatable experience for the users. This will keep them captivated in virtual economies by keeping the environment inherently unpredictable. There are both unexpected and expected events that cause unknowable uctuations in every sector of the economy, and these cannot be predicted with great accuracy or even at all. The emergence of the Internet has created new 8

jobs and made previous ones obsolete, created and destroyed product markets, and continues to improve production eciency in unprecedented ways. These and many other types of shocks aect the economy in many ways through the same sources of unpredictability found in natural science, none of which can be predicted with great accuracy in the long run. We are condent none of the previous economic forecasts before the emergence of the internet would have seen Rovio making a $94 million prot in 2011 o the Angry Birds app, just as biologists who discovered bird u could not predict it could mutate into H5N1 in 1997 or be just 3 mutations away from a pandemic in 2012. There is also an extra layer of complexity that is not present in other sciences because of the components of an economic system. Humans have the capability to constantly adapt and adjust their decision and expectations in response to the decisions and expectations of others. This allows them to change the very environment they are simultaneously creating, leading to unknowable results. According to Cziko these unknowable results from human behavior will happen whether or not the system they are created in is deterministic or indeterministic (1989). In a deterministic world, everything follows certain laws that would, in theory, make the next step predictable. However, two important things are needed for these predictions: incredible accuracy and complete information of the system. As Blankmeyer mentions, there are certain pairs of variables that can never be known precisely at the same time and makes accurate measurements and information impossible (1999). There is also the problem of chaos in a deterministic world that can make long-term predictions too inaccurate to matter for any serious purposes (Cziko, 1989). There are also arguments outlined by Cziko that human behavior is by nature indeterministic due to things that would make economics, a science based on human agents, necessarily unpredictable (1989). These ideas will be explored in more depth and provide the reasons why, if a virtual economy is too simulate the real economy to provide incentives to stay in the environment, it must be unpredictable to the user. The Heisenberg Uncertainty Principle The Heisenberg Principle is a theory in physics formed by Werner Heisenberg and rst described in a letter in 1927 that explained the uncertainties that occurred when trying to measure the position and momentum of a particle were not solely from the error of the experiments, but rather inherent in quantum mechanics (AIP, n. d.). This was later generalized to the principle that can be applied to economics. Blankmeyer summarizes it as, certain pairs of variables do not commute: they cannot be brought into precise focus simultaneously (1999). Economics is not immune to this phenomenon, and there are many cases where stabilizing one variable destabilizes another. Monetary authorities cannot stabilize both the money supply and interest rate simultaneously (Blankmeyer, 1999), just as a buer stock, while stabilizing the price, destabilizes the equilibrium quantities that are traded (Blankmeyer, 2011). 9

Blankmeyer continues to expand the comparisons of quantum physics to economics thorough one of the most important outcomes of the Heisenberg principle. The uncertainty principle implies that the exact trajectory of a particular electron is inherently unpredictable, and any statement about its future position must be framed in statistical terms (2009). This can be observed in economics when studying the eect of prices changes of several goods. After eliminating the income eect, the relationship between the price change and quantity change is expected to be an inverse relation. This cannot predict how the consumers behavior will change toward one good in particular though; it just states that he is on average more likely to increase purchases of good whose price decreased and decrease purchases of those whose price rose (Blankmeyer, 1999). Another outcome of the Heisenberg principle is the wave and particle behavior of matter that exists together but cannot be observed simultaneously. This brings up the fact that in economics, while theoretical equilibrium are smooth and continuous like water owing between two points, real economic equilibriums are like sand, discrete and subject to friction (Boccio, 2011). This means that the real world equilibrium for a market may not lie of the productions possibility frontier or demand curve, thus making the price continuum obsolete when trying to nd it (Blankmeyer, 2009).

The Boehner Uncertainty Principle These are some of the many parallels between the Heisenberg principle in the natural sciences to the eld of economics, but economics also has its own version of an uncertainty principle. In an August 2010 speech Republican Senator John Boehner described the problem with uncertain government intervention during the ongoing recession which was later summarized as the Boehner uncertainty principle, stating that government eorts to increase regulation lead small business to delay investment and hiring until the new regulations impact is well understood (Shane, 2011). This principle describes the intersection of uncertainty and human behavior, and complicates governments responses and the reliability of economic forecasts during dicult economic times.

Economic Chaos Even if the eld of economics is deterministic there is still unpredictability through chaos, which makes the deterministic system uctuate wildly with unlimited potential endings. Cziko describes one process of chaos as a system where each individual step is predictable by deterministic measures but the outcome of a sequence of events cannot be determined. While the step directly following the currently solved one, which depends on the answer, can be found it is impossible to tell what any ith value will be. 10

This aspect of chaos will occur even with the most precise available knowledge of the relevant initial conditions. This is crucial because the importance of initial conditions is another aspect of chaos that makes systems, including an economy, unpredictable. Termed the buttery eect by MIT meteorologist Edward Lorenz, it has wide ranging implications in weather forecasts and their unreliability. Cziko applies this to the example of mathematics knowledge between two classmates at the beginning of a school year. If tiny dierences in the amount of information each had can lead to widely dierent scores at the end of the year, then nancial planning and investments can also face the same sensitivity to initial conditions, aecting the entire economy (1989).

Dierent Types of Economic Evolution This deterministic approach can be related to phenotypic evolution, with genotypic evolution representing the unanticipated shocks to an economy. Winkler uses phenotypic evolution to mean that the realization (i.e. the phenotype) of a system changes over time to develop according to its underlying potentialities (i.e. its genotype), while this genotype itself remains constant (2005). In the economy the phenotypic evolution is a complicated process that changes the genotype, again changing the process of the phenotypic evolution. The genotype can also change randomly on its own, such as when new technologies are introduced or new sources of natural resources are discovered (Winkler, 2005). These events drastically impact the entire evolution of the system in ways that we have shown are impossible to foresee. Another important aspect of this evolution is that it can be aected by actual human evolution and genetic changes that creates an interesting intersection of economics and genetics: genoeconomics (Benjamin et al., 2006). Benjamin et al. illustrate this eld by posing an interesting question about the aect cigarette taxes will have on the genetic component to lung cancer in future generations. A persons genes may control certain proximal behavioral phenotypes such as risk-aversion or impatience, which in turn aect distal economic phenotypes such as labor force participation and wealth accumulation. This also pulls from neuroeconomics, the study of the neuroscientic bases of an agents economic behavior. One example of this relatively new eld is the research into how the limbic and cortical systems control the level of patience in an individual. Genes aecting these biological systems by extension eect the entire economy, creating a complex network in which spontaneous mutation of certain literal genes aect the phenotype and genotype of the economy (Benjamin et al., 2005). These unknowable genetic mutations and evolution contribute the to unpredictability of the economy, something that is aected by the very genetic foundation of its human agents.

Human Expectations and the Stock Market 11

Moving on to an entirely indeterministic system provides new sources of unpredictability for the economy, and one the most important of these is human expectation. To look closer into this, we must rst look into disagreement and its inherit unpredictability. Hanson proved that no agent can ever tell another agent the direction in which that other agent will, at some future time, disagree with his current opinion (2002), and this is a driving force behind diering expectations in the economy. It then sets the stage for the current real world markets, which Lachman states would not exist without it (1977). He argues that outside shocks alone do not cause the uncertainty seen in todays economy, as they would not create the continuous process of changing equilibriums. This is where constantly changing expectations enter in as people use their expectations based o the decisions of others which then create changes that aect the expectations of others, who then change theirs accordingly to create a continuous cycle. The stock market is one example Lachman uses to emphasize of the importance of both human inconsistency and unexpected changes. The whole idea of the stock market is based on the fact that there is no long-term predictable equilibrium, or else there would be no market. People buy and sell stocks based on their own expectations of what will happen to the price, and this requires others who think the other way. If there expectations remained constant the market would settle into an equilibrium, disrupted by unexpected shocks but able to readjust and reach a new stable price until the next shock (1977). The entire stock market is based on the unpredictability of the economy, something that fascinates people into dedicating their lives to try and nd some way to beat this system. This interest would not be present without the economys natural unpredictability.

Learning Never Occurs the Same Way Twice Many aspects of the main agents, humans, cause the diering expectations in an economy, which drive its unpredictability. Cziko touches upon these and examines their eect on teaching methods, but they can also be applied to economic learning and decisions. The rst subject mentioned is that learning is an evolutionary process, one subject to the same uncertainties in its phenotypic and genotypic evolution as described above. New ideas and skills are created as spontaneous hypotheses, which are then weeded out through hypothesis testing in a survival of the ttest, which creates the growth of knowledge. This means that just like with the evolution of life (a process that is extremely unlikely to be replicated even if all of the initial conditions where matched exactly), learning would almost never occur the same way, even with exact clones of the teacher and student. With such variability in the way humans form economic decisions there are too many possible outcomes to accurately predict the one that will occur. There is also the problem of individual dierences between

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humans, something chemists do not have to worry about between two atoms of hydrogen or two molecules of water. The news about a certain stock will aect two people dierently, with one betting on its decrease in value and the other on its increase, leading to expectations competing in a world they are simultaneously creating (1977).

Time in Economic Decisions The element of time also helps to create the real world uncertainties observed in the economy. Arthur cites a simulation of the stock market that was run two different ways. In the rst run there was enough time between shocks to let generated hypotheses completely take eect before the next shock was introduced. Here the hypotheses converged into one standard expectation, but that was not the case when the timings were changed to mirror the real-world pace. Once that was introduced the hypotheses broke o into many divergent ones that mimicked anomalies found in the actual stock market (1999). This crucial time element is something that must be included in a virtual economy to assist the creation of unpredictability for the users.

Need For Unpredictability in a Virtual Economy Now that we have shown that humans and the economy are unpredictable we will move on to why virtual worlds, and by extension virtual economies, should also be unpredictable to the user. There are two main reasons for this, and both focus on improving the experience of the person in the virtual world. The rst is that it should mimic the real world to create a relatable experience for users. Chapman explains that while there are some limits to this, such as taking advantage of the chance to over represent the positive aspect while eliminating the negative, most virtual games make it a point to have their game relatable. If it is not possible through the settings and story, then she argues the creators will include it by the realism of the characters (2011). The realness of a virtual reality will also aect how immersed the player feels in it. According to McGloin in The Eects of Perceived Realism and Controller Naturalness on Immersion and Aggression in a Violent Video Game, participants experienced more realistic reactions to the environment in simulations with more realistic aspects, such as shadows or reections, then when they were missing. This same principle applies to virtual worlds through a computer, although to lesser degrees. However, the more realistic the world is, the more likely users are to react realistically (2011). There is also a certain level of comfort with more realistic aspect in a game, as shown by the reaction of users of The Sims Online. As F. Gregory Lastowka and Dan Hunter point out, the central economy rst implemented in the online world of the Sims was dierent from the more free-market leaning economies most users were used to in everyday life. Users had to buy land from what was similar to a central government agency that would not negotiate on price. Lastowka 13

and Hunter saw that the online users objected to this system, and The Sims Online then announced it was switching to a more realistic and familiar free market system (2004). The need for the familiar and realistic is a major force in the creation of virtual environments, and this is shown to extend to the economy portion as well. The other reason to incorporate unpredictability into the design of a virtual world is to use it as a way to captivate the users and keep their interest. In Rouse Richards textbook Game Design: Theory and Practice, he devotes a section from the creation of opponents and obstacles on why they need to be unpredictable. According to Richard, in all art, viewers want to see something they have not been able to participate, an important concept in video games and also virtual worlds as a whole, whether or not the user sees it as art. There is a need for something that challenges their expectations. In Game Design this is shown to be crucial, as players will only play the game until it ceases to be challenging (2010). As John Funge aptly explains in Cognitive Modeling for Games and Animation, unpredictability is the dierence between the excitement of a player in a game running from falling bricks and the boredom of being able to calculate where each brick will fall and just wait safely until the danger passes (2000).

Conclusion One of the biggest challenges for a virtual economy is to incorporate unpredictability when real-world economists are still trying to embrace it. According to Tibbs economists are trying to copy the predictability in other sciences such as physics without realizing that the idea of reliably predicting events in those elds has long been abandoned (2010). There are many weaknesses with this perceived need for great predictive power, perhaps best shown by Burton Malkiels random walk hypothesis that states the past performance of stock cannot be used to predict future trends and are as random as the path a drunk takes (Scott, 2003). As Tibbs points out, unpredictability is not the end of economics but must be accepted and acknowledged in economic theories (2010). It will also be important for virtual economies as users want more and more of a real-life experience to hold their attention, and the examples and sources of unpredictability presented here will hopefully be a starting point for incorporating this important concept into the creation of a virtual economy. Thank you for reading! -Sudarshan Gopaladesikan and Amanda Sestito

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