This is the first in a series of articles that I plan to write where I discuss (behavioral) economic concepts that I believe may be interesting to the TB community; that members may find entertaining and have their curiosity peaked. In the article I simplify some concepts and take them in isolation in order to help with readability. Remember, this text expresses my thoughts on very specific topics only, it is not a lecture in economics, finance or decision-making and it is by no means meant to be financial advice. Always DYOR.

The floor price action we are seeing doesn't really surprise me, and in following I’ll explain parts of why that is. NFT project’s underbidding and floor-price action has elements of what in economics and game theory is referred to as a “collective good problem” or a “social dilemma problem”, so I’ll start by explaining the concept.

Social dilemma problems occur when a person has a choice to make in a situation in which the choice that is optimal for the individual/person (in the short run) differs from the choice that is best for the society/group as a whole (in the long run). In other words, it's a situation that can lead to too many group members choosing to pursue individual profit and immediate satisfaction rather than behave in the group's best long-term interests.

Everyone understands taxation, so let's look at the issue from the point of view of paying taxes. If taxation was not enforced by government bodies but was free for each person to decide whether to pay it or not, we would have a social dilemma problem. Let's imagine a world where taxation is not mandatory and where people are free to make one of two choices, “pay tax” or “don’t pay tax”:

• PAY TAX - In a world without corruption and where tax revenue is not misused, the socially optimum outcome is for everyone to pay a small tax (if everyone pays and the funds are not misused, a small tax would be enough). Tax revenue would allow for security, infrastructure (roads, street lighting, communal services…), healthcare, defence, etc.; things that make life for everyone significantly better than living without them.

• DON’T PAY TAX - Your individually optimum choice (the best thing for you), however, is to not pay any taxes. Why? Because if everyone else pays taxes then you will still have all the benefits of a functioning modern society listed above (your tax contribution in the grand scheme of things is negligible), but you will also get to keep the extra money that would have gone towards paying the tax. Thus, the single best outcome for you is to not pay tax (while, hopefully, everyone else chooses to pay it).

So, where is the problem then? The problem is that what is individually optimum for you is also individually optimum for everyone else! In other words, everyone’s best outcome is to not contribute (pay tax) themselves while everyone else contributes.

In fact, not contributing is always the best outcome for each individual no matter what everyone else does:

• If everyone else pays tax, you are better off not paying it because it means you will get full benefit of a functioning society plus you keep your money.

• If no one else pays tax, you are still better off not paying it as you won't get any benefits of a functioning society (your contributions are not enough to make a difference), and you will just have wasted part of your money.

Thus, game theoretically, we say that the Nash equilibrium (the expected outcome if every individual is rational) is for everyone to contribute 0 (zero!) to the social good (to paying taxes in this example) and therefore act in their own best interest. The problem is that by everyone acting in their own best interest, all individuals will become significantly worse-off in the long run: no one pays taxes so soon after you end up with no infrastructure, no utilities, no safety, no healthcare and life will become significantly worse than if everyone just paid some taxes. The whole society WILL become worse off, hence the name “social dilemma”.

Let’s look at an example with numbers. For the sake of simplicity, let’s say this society consists of only two members and two choices:

How do we read the table? Both you and the other person have a choice to make, pay tax, or don’t pay tax, without knowing what the other will do. The numbers in blue are how much value you get depending on the choices you and the other person make, the numbers in red are how much value she/he gets.

As you can see, the socially optimal choice is for everyone to pay taxes. Why? Because out of all four possible outcomes that outcome will make the whole society the wealthiest (a value of $2000 in total will be shared among its members, $1000+$1000). However, you (individually) are better off not paying tax because whatever the other person does you will always get more value by not paying it; $1200>$1000 if the other person pays tax, and $200>$100 if the other person doesn’t pay tax. The same argument applies to the other person, he is always better off not paying the tax, whatever you decide to do. The problem: Well, if you both do what is best for you, you will both only get a value of $200, and the whole society would be much worse off ($400 value in total). Ironically, so will you.

Unfortunately, this is exactly what tends to happen in real life… if tax was not mandatory, many people wouldn’t pay it because of what we colloquially call greed (or rationality :P), and others will stop paying it soon after because they see that most don’t pay it and they decide not to be the only “dumb ones” that do pay.

This is precisely why taxes are not based on voluntary contributions and are enforced by governments. That way they don’t suffer from the social dilemma problem (of course, we are talking about the idealistic world where we can disregard corruption, tax loopholes, offshore accounts etc.).

For more reading on related issues look up “Public Good Problems”, “Prisoner’s Dilemma”, and “Tragedy of the Commons”.

Anyone who has spent some time on any project’s Discord channel understands how NFT ownership often comes with a community/society feel to it.  More importantly, deciding what to do with one’s NFT, to list an NFT at or below floor price or not, can be viewed from the lens of a social dilemma problem (though, remember, many economic and individual factors may come into play when people make buying/selling/listing choices irl). For the sake of simplicity, let’s say the choices available are “undercut the price” and “don’t sell”:

• For projects for which there is positive demand, the social optimum would be for individuals to not sell anywhere near floor prices (or at all). This will lead to a price/value increase for each holder (plus, there is evidence that demand in this space increases for projects that increase in price).

• On the other hand, the individual optimum is to undercut the floor by the smallest amount.

  • If no one else lists/undercuts and you are the only person selling, then you can sell your NFT for whatever the single craziest individual is willing to pay you (think about the ASTRONOMICAL price of a BAYC if only 1 person was selling instead of the 782 that currently are). So, theoretically, your optimal strategy would be to start listing at ∞-1 [ETH supply-1], and undercut yourself till someone buys it.

  • If everyone else is listing/undercutting the price, you are also better off undercutting because the others will eventually bring the price down to 0.

So, if everyone follows the individual optimum (undercuts) then the price will eventually reach a price close to zero and everyone will be worse off in the end, i.e. we have a situation that resembles a social dilemma problem.

No! Well, maybe. The academic evidence on social dilemmas is clear: if we are left to our own devices, we would likely end up where we would rather not be.

So we are actually doomed then? No, no. Luckily one main question that behavioral economists have been trying to answer is how to best apply mechanisms to nudge individuals to make decisions closer to the long-term optimal outcome rather than the short term one. Even better, the research findings to this question are pretty conclusive, there are mechanisms that do work, and with Tasty Bones we will be implementing a few of them.

After their implementation, I plan to write a follow-up article where I will explain how and why they have been found to work in controlled settings, as well as evaluate their effectiveness in our (TB’s) case. Till then, buckle up and enjoy the ride. WGMI!

@VforVeidt

This is the first in a series of articles that I plan to write where I discuss (behavioral) economic concepts that I believe may be interesting to the TB community; that members may find entertaining and have their curiosity peaked. In the article I simplify some concepts and take them in isolation in order to help with readability. Remember, this text expresses my thoughts on very specific topics only, it is not a lecture in economics, finance or decision-making and it is by no means meant to be financial advice. Always DYOR.

The floor price action we are seeing doesn't really surprise me, and in following I’ll explain parts of why that is. NFT project’s underbidding and floor-price action has elements of what in economics and game theory is referred to as a “collective good problem” or a “social dilemma problem”, so I’ll start by explaining the concept.

Social dilemma problems occur when a person has a choice to make in a situation in which the choice that is optimal for the individual/person (in the short run) differs from the choice that is best for the society/group as a whole (in the long run). In other words, it's a situation that can lead to too many group members choosing to pursue individual profit and immediate satisfaction rather than behave in the group's best long-term interests.

Everyone understands taxation, so let's look at the issue from the point of view of paying taxes. If taxation was not enforced by government bodies but was free for each person to decide whether to pay it or not, we would have a social dilemma problem. Let's imagine a world where taxation is not mandatory and where people are free to make one of two choices, “pay tax” or “don’t pay tax”:

• PAY TAX - In a world without corruption and where tax revenue is not misused, the socially optimum outcome is for everyone to pay a small tax (if everyone pays and the funds are not misused, a small tax would be enough). Tax revenue would allow for security, infrastructure (roads, street lighting, communal services…), healthcare, defence, etc.; things that make life for everyone significantly better than living without them.

• DON’T PAY TAX - Your individually optimum choice (the best thing for you), however, is to not pay any taxes. Why? Because if everyone else pays taxes then you will still have all the benefits of a functioning modern society listed above (your tax contribution in the grand scheme of things is negligible), but you will also get to keep the extra money that would have gone towards paying the tax. Thus, the single best outcome for you is to not pay tax (while, hopefully, everyone else chooses to pay it).

So, where is the problem then? The problem is that what is individually optimum for you is also individually optimum for everyone else! In other words, everyone’s best outcome is to not contribute (pay tax) themselves while everyone else contributes.

In fact, not contributing is always the best outcome for each individual no matter what everyone else does:

• If everyone else pays tax, you are better off not paying it because it means you will get full benefit of a functioning society plus you keep your money.

• If no one else pays tax, you are still better off not paying it as you won't get any benefits of a functioning society (your contributions are not enough to make a difference), and you will just have wasted part of your money.

Thus, game theoretically, we say that the Nash equilibrium (the expected outcome if every individual is rational) is for everyone to contribute 0 (zero!) to the social good (to paying taxes in this example) and therefore act in their own best interest. The problem is that by everyone acting in their own best interest, all individuals will become significantly worse-off in the long run: no one pays taxes so soon after you end up with no infrastructure, no utilities, no safety, no healthcare and life will become significantly worse than if everyone just paid some taxes. The whole society WILL become worse off, hence the name “social dilemma”.

Let’s look at an example with numbers. For the sake of simplicity, let’s say this society consists of only two members and two choices:

How do we read the table? Both you and the other person have a choice to make, pay tax, or don’t pay tax, without knowing what the other will do. The numbers in blue are how much value you get depending on the choices you and the other person make, the numbers in red are how much value she/he gets.

As you can see, the socially optimal choice is for everyone to pay taxes. Why? Because out of all four possible outcomes that outcome will make the whole society the wealthiest (a value of $2000 in total will be shared among its members, $1000+$1000). However, you (individually) are better off not paying tax because whatever the other person does you will always get more value by not paying it; $1200>$1000 if the other person pays tax, and $200>$100 if the other person doesn’t pay tax. The same argument applies to the other person, he is always better off not paying the tax, whatever you decide to do. The problem: Well, if you both do what is best for you, you will both only get a value of $200, and the whole society would be much worse off ($400 value in total). Ironically, so will you.

Unfortunately, this is exactly what tends to happen in real life… if tax was not mandatory, many people wouldn’t pay it because of what we colloquially call greed (or rationality :P), and others will stop paying it soon after because they see that most don’t pay it and they decide not to be the only “dumb ones” that do pay.

This is precisely why taxes are not based on voluntary contributions and are enforced by governments. That way they don’t suffer from the social dilemma problem (of course, we are talking about the idealistic world where we can disregard corruption, tax loopholes, offshore accounts etc.).

For more reading on related issues look up “Public Good Problems”, “Prisoner’s Dilemma”, and “Tragedy of the Commons”.

Anyone who has spent some time on any project’s Discord channel understands how NFT ownership often comes with a community/society feel to it.  More importantly, deciding what to do with one’s NFT, to list an NFT at or below floor price or not, can be viewed from the lens of a social dilemma problem (though, remember, many economic and individual factors may come into play when people make buying/selling/listing choices irl). For the sake of simplicity, let’s say the choices available are “undercut the price” and “don’t sell”:

• For projects for which there is positive demand, the social optimum would be for individuals to not sell anywhere near floor prices (or at all). This will lead to a price/value increase for each holder (plus, there is evidence that demand in this space increases for projects that increase in price).

• On the other hand, the individual optimum is to undercut the floor by the smallest amount.

  • If no one else lists/undercuts and you are the only person selling, then you can sell your NFT for whatever the single craziest individual is willing to pay you (think about the ASTRONOMICAL price of a BAYC if only 1 person was selling instead of the 782 that currently are). So, theoretically, your optimal strategy would be to start listing at ∞-1 [ETH supply-1], and undercut yourself till someone buys it.

  • If everyone else is listing/undercutting the price, you are also better off undercutting because the others will eventually bring the price down to 0.

So, if everyone follows the individual optimum (undercuts) then the price will eventually reach a price close to zero and everyone will be worse off in the end, i.e. we have a situation that resembles a social dilemma problem.

No! Well, maybe. The academic evidence on social dilemmas is clear: if we are left to our own devices, we would likely end up where we would rather not be.

So we are actually doomed then? No, no. Luckily one main question that behavioral economists have been trying to answer is how to best apply mechanisms to nudge individuals to make decisions closer to the long-term optimal outcome rather than the short term one. Even better, the research findings to this question are pretty conclusive, there are mechanisms that do work, and with Tasty Bones we will be implementing a few of them.

After their implementation, I plan to write a follow-up article where I will explain how and why they have been found to work in controlled settings, as well as evaluate their effectiveness in our (TB’s) case. Till then, buckle up and enjoy the ride. WGMI!

@VforVeidt