Analysis of Market Manipulation in Diablo III
Lee Jong Min 20070625, Maneerat Termtanasombat 20091319
HSS453 Behavioral Finance
Fall semester 2012
Abstract
Our case study is about the market manipulation in Diablo III, an online role-playing
game. The manipulators spread a hoax claiming that Gold, the game money in Diablo III, can
be indefinitely copied via Chipped Topaz gems, the lowest grade gems in the game. Despite
the unlikeliness of the news and the unreliability of informed sources such as game internet
communities, many gamers were fooled by the false news and eventually involved in the
market manipulation. The manipulators gained huge amount of profit not only in game
money by selling a highly price Chipped Topaz gems but also in real money because the
price of Gold in real cash dropped to less than half due to the rumor. To study this interesting
event, we introduced an example of market manipulation in the real stock market, proposed
reasons why the Efficient Market Hypothesis cannot explain this situation, and suggested the
possible behavioral factors that are involved in this phenomenon. We discussed the
differences between market manipulation in Diablo III and that in the real stock market to
point out the fact that people are more vulnerable to market manipulation in games. Finally,
we suggest that it is important to understand human’s behavioral mechanism in order to
prevent ourselves from being involved in any kind of market manipulation.
Introduction
Diablo III is a renowned MMORPG(Massively Multiplayer Online Role-Playing
Game). In RPG games, players raise their characters by gaining experience points and game
money through completing quests and engaging in “farming”, which means killing game
monsters repeatedly. Monsters randomly drop items (equipment, game money, and other
goods) on death, which can be sold to other players in the game via trading with game money.
A character’s “spec” is largely dependent on the equipment they wear, so the need for making
their characters stronger by wearing better equipment is the driving force for trading in RPGs.
But in most cases, farming is a tedious process because it involves simple repetitions and the
item drop probability is random. As a result, a number of people resort to buying game
money or items from other players with real cash. Once, a crossbow in Diablo III was sold
for 7,300,000 Korean Won [1]. Because the game market and real cash is linked in such a
way, and because the value of goods in the game is constantly swayed by patches and new
strategies, as the stock price would be by company performance, we concluded that the
market in Diablo III and the real stock market was similar enough to be subject to analyze
with the Efficient Market Hypothesis (“EMH”) and behavioral finance concerning market
manipulation.
Market manipulation has been a well-known occurrence in the stock market for a long
time. Many countries such as United States and Australia have prohibited this action,
1
however, market manipulation still exist and is not completely controlled. There are many
ways that the market can be manipulated. For example, manipulators usually create a rumor
by releasing fake news especially on a reliable website or service. To attract more investors
and make them believe the news, manipulators sell and repurchase the same stock to make
the price and trading activity increase. This action is called “Wash trading”. When a lot of
value investors are involved in that stock during the manipulation, the price of the stock will
further increase [2]. Finally, the manipulators who hold many stock shares can gain huge
amount of profit by quickly sell the stock at a very high price.
One good example of the market manipulation would be about the false news that
ICOA Inc., a wireless internet hotspot provider, had been acquired by Google for 400 million
dollars [3]. The news was originally released on 26 November 2012 by PRweb, one of the
most socially shared news release services own by Vocus [4], and then was rapidly shared
through social network as the name of a big company Google make it appears like a big event.
It should be noted that the news from PRweb can be released after their professional have
checked the submitted news, so the news that are released from this service is likely reliable.
The person who submitted this news to PRweb used the email that pretends to be the ICOA
email. Moreover, since Google are working on the internet fiber and also support Boingo WiFi hotspot in many public areas, this news seems to be legitimate. It is quite obvious that the
intention of releasing this fake news is to manipulate the stock price of ICOA Inc. On the day
of news release, the price of this penny stock increased five times from 0.0001 to 0.0005
dollars in less than two hours (Figure 1). At the time that price are at the highest, there was a
peak in trading volume, more than 300 million stock shares were changed hands, and then the
price was shockingly dropped down to normal. This would allow the manipulators who know
inside information to gain a great profit.
Figure 1: Stock price of ICOA Inc. on 26 November 2012 [5].
The manipulators in Diablo III utilized a similar method, to increase the price of a
certain item, the details of which are described below. Because both cases are alike, the
2
behavioral factors behind them are bound to coincide. Our aim is to differentiate the two,
concentrating on factors that normally do not apply to the real stock market situation.
The Fraud
Before describing the actual event, some characteristics of Diablo III must be noted.
Gems
Gem is a commodity in Diablo III that is used to enhance other equipment. There are
14 grades of gems, from chipped to radiant star, and that lesser grade gems are used to make
better grade gems, so they are considerably cheaper.
Figure 2: Kinds and grades of gems in Diablo III [6].
The Auction House
In the auction house provided by the game, sellers upload their goods at their own
designated price, and buyers can search and sort the goods they want and use the game
money, namely, the Gold, to buy. While the price of other individual equipment is shown to
the buyer, it is different for gems. When the buyer searches for a specific kind and grade of
gem, he or she can only view the average price of all the gems on sale, not the individual
price. On purchase, if there is a gem with a cheaper price than the average it is purchased and
the difference is refunded to the user.
The Manipulation
The manipulators first hoarded large amounts of Chipped Topaz (lowest rank of gem
and the cheapest) and uploaded them for a very high price. After that they used other game
accounts to buy the highly priced gems and repeated the buying and selling, which is similar
to wash trading in the real stock market. Because the trade volume is normally small for the
lowest grade gems, the average price of gems readily increased.
Next, they uploaded articles claiming that a group of people in Taiwan succeeded in
copying Gold, as if counterfeiting. The articles said that when the seller cancels the Topaz on
sale at exactly the same time the buyer presses the purchase button, the seller will get back
both the gem and the purchase money, while the buyer gets back his or her own Gold. Figure
3 is the screenshot they used to prove their point.
3
Figure 3: Screenshot included in the manipulators’ article [7].
Figure 4 is the screenshot from a well-known internet community called dcinside.com.
The underlined articles’ titles imply that it was written by the same person using multiple IDs.
Figure 4: Screenshot from dcinside.com [7].
Because the average price of the Chipped Topaz appeared to be absurdly high, the
story became more believable and many people bought the Topaz. In addition, the market
price of Gold in Gold-cash trading websites dropped to less than its half, as shown in Figure 5.
Figure 5: Gold-cash ratio from B site [7].
4
A while later, the screenshot the manipulators used turned out to be a fake, as the
large amount of money in the screenshot was actually the refund from buying 6,300 Square
Emeralds, rather than the purchase money from selling Topazes, as shown in Figure 6.
Figure 6: Translation of the fake screenshot [7].
According to the EMH, people are assumed to be rational and open to all information.
If this was the case, people should have realized the error in the screenshot in first hand and
not have fallen for the trick. In addition, the arbitrageurs, who is assume to be rational and
open to all information, should have counteracted against the price increase, namely by
refraining from buying the Topazes and posting counterarguments against the manipulators’
articles. The same can be said to our case of stock market manipulation, so it can be
concluded that EMH fails to explain the phenomenon of market manipulation. Next we
explain why people failed to act rational and efficiently in terms of behavioral finance.
Possible Behavioral Factors
Conformity and Herding
Conformity is a kind of social influence that involves change in attitudes, beliefs, and
behaviors in order to match with the majority of the people in a group [8]. It can occur not
only when people are with others but also when they are alone. For example, people usually
follow the social standard while watching television. In the case of Diablo III, although the
news of copying gold from Chipped Topaz contradicted the evidence of their senses, many
people conformed on the majority. Because the manipulators spread the fake news with
multiple IDs and the price of Chipped Topaz had increased by the manipulation, people
thought that a lot of people were really buying the Chipped Topaz at the moment, and joined
the trend by buying the Chipped Topaz at an absurdly high price. Furthermore, because of
herding, they would feel less regret if the news turned out to be false since they knew that
many others did the same thing. Thus, without any rational analysis, they just simply bought
the gems like the others did.
5
The Media
Since the news of game bugs are frequently acknowledged in game communities, the
media works to amplify psychological biases of people. People usually keep an eye on the
changing situation. When they noticed that other people were seen to be getting benefit from
the game bugs, they did not want to be left behind. Because game bugs are usually fixed
quickly, the feeling of ‘need for speed’ was really intense among gamers. People had no time
to analyze whether the information was really true or not. So they were less rational and more
emotional when they were choosing to buy gems.
Attraction of gambling
Actually, people were aware of the fact that the news might be a fraud, but they just
wanted to take a risk. According to the prospect theory, a weighting function is overestimated
at very low probabilities. Also, when people are dealing with affected-rich item such as Gold,
they have a feeling of hope that exaggerates their probability estimation. Therefore, the
weighting function becomes even more curved at low probabilities [9]. This explains why
people are attracted to gambling. The Chipped Topaz was relatively cheap even after it was
manipulated while the expected return was infinite amount of Gold. So the Chipped Topaz
had the required characteristic of gambling: “low price and a high return volatility” [9].
Hence, the reason why people were buying gems was not only because they believed the
news but also because they were attracted to gambling.
Uniqueness of Diablo III Market
At this point we pose a question: is Diablo III the same as the stock market? We have
seen that both are subject to similar methods of market manipulation. But closer examination
evidently shows that the manipulators took advantage of our psychological biases in three
aspects which are not possible in the real stock market.
Exploiting the Flaw in the System: the Auction House
In the real stock market, wash trading can only have indirect effect on the stock price.
On the other hand, Diablo III’s auction house made it possible for the manipulators to directly
change the market price by buying and selling large amounts of Chipped Topazes for three
reasons. Firstly, the market price is determined by taking the average price of traded gems.
Secondly, the trade volume for the Chipped Topaz is quite small since it is of the lowest
grade. Finally, because the gem is of the lowest grade and consequently inexpensive in the
first place, buying and selling huge amount at the increased price did not cause much Gold
loss for the manipulators due to the 15% lot commission. Because most people were ignorant
of such a thing being possible, the manipulators had taken advantage of the people’s limited
access to information.
6
Nature of Game “Bugs”
Unlike the real stock market, bugs appear frequently in many games. Because bugs
are unexpected errors that arise from faults in programming, it can only be found by chance.
If the discovered bug is unfairly beneficial to the players, those who found it normally tries to
get the most out of it before it is known to the game makers, since they will quickly remove it
from the game via patches. Therefore, the manipulators’ story was not an unusual one, and
the normal reaction of a player to such news is “I have to get the most out of it before the bug
is fixed.” As it is already explained above, the “need for speed” was greatly amplified by
factors not present in the real stock market.
More like Gambling
Normally, investors in the real stock market do not readily gamble due to loss
aversion, except for those who seek sensation from gambling. But the Chipped Topaz’s price
was considerably cheap even after the absurd price increase because it is of the lowest grade.
On the other hand, if the bug turned out to be true, the player will be able to gain infinite
amount of Gold. As already mentioned above, this reflects “low price and a high return
volatility”, which attracts people to gamble. This is different from the stock market’s tape
painting, because in the stock market case the manipulators normally aim to make the target
stock look safer to buy, that is, to make the gain look more certain. It is due to the fact that
the occurrence of stocks of extremely low price and extremely high return is quite unlikely in
the real stock market.
Conclusion
So far, we have analyzed the market manipulation in Diablo III. As EMH fail to
explain the phenomenon of market manipulation, either in Diablo III or the real stock market,
possible behavioral factors that make people subject to market manipulation was suggested.
In addition, certain characteristics of Diablo III market that the manipulators exploited and
that do not exist in the real stock market were signified.
Because Diablo III is not the only MMORPG out there, it would be interesting to find
cases of market manipulation in other MMORPGs. Furthermore, identifying other cases of
market manipulation in any kind of market and analyzing their similarities and differences
would help broaden the scope of behavioral finance.
Even if one is familiar with the known methods of market manipulation in the stock
market, he or she is not safe against new types of market manipulation such as our case in
Diablo III. In addition, it is actually easier to be involved in game market manipulation
because there is no law and strong penalty that restricts this action. Therefore, it is best that
rather than simply learning their strategies, we arm ourselves against any types of
psychological biases and thereby prevent future loss of wealth.
7
Reference
[1] Jong Woo Won. “디아 3 지존템 730 만원에 현거래 - 디아블로 3 지존 전설 아이템
만티코어 ㄷㄷㄷ.” 2proo.net. 2012. Web. 21 Dec. 2012. <http://2proo.net/1808>
[2] “Stock Market Manipulation.” make-money-stock-value-investing. 2012. Web. 19 Dec.
2012. <http://www.make-money-stock-value-investing.com/stock-marketmanipulation.html>
[3] Arik Hesseldahl. “Fake Google Press Release Didn’t Net Anyone Much Money.”
AllThingD. 2012. Web. 19 Dec. 2012. <http://allthingsd.com/20121126/fake-googlepress-release-didnt-net-anyone-much-money/>
[4] “About PRWeb.” PRweb. 2012. Web. 19 Dec. 2012. <http://www.prweb.com/>
[5] John Herrman. “Someone Invented A $400 Million Google Deal — And May Have
Made Money From It.” BuzzFeed. 2012. Web. 19 Dec. 2012.
<http://www.buzzfeed.com/jwherrman/how-a-rogue-prankster-invented-a-400mgoogle-deal>
[6] “New Diablo 3 Beta Screenshots: Gear, Runestones & Gems Progression.”
D3Cauldron. 2011. Web. 19 Dec. 2012. < http://d3cauldron.com/2011/08/new-diablo3-beta-screenshots-gear-runestones-gems-progression/>
[7] “디아 3 판 허생전? 황당한 토파즈 복사 사건의 전말.” www.thisisgame.com. 2012.
Web. 21 Dec. 2012.
<http://www.thisisgame.com/board/view.php?id=1236886&category=16501>
[8] “Conformity.” Wikipedia. 2012. Web. 19 Dec. 2012.
<http://en.wikipedia.org/wiki/Conformity#cite_note-1>
[9] J.R. Nofsinger. The Psychology of Investing 4th edition. Boston: Prentice Hall, 2011.
Print.
8