If you've played online games at any time in the last few years, even the humblest mobile phone game, you've probably been confronted with 'loot boxes' - a virtual container in a game that, when opened, gives you a randomised set of rewards. These rewards might be cosmetic, they might be power-ups, or they might be in-game currency. Often, these loot boxes can be purchased with real money. There is increasing concern that loot boxes are a form of gambling, as the Belgian Government concluded back in 2018.
What drives gamers' willingness-to-pay for loot boxes, and are game developers able to use the design of loot boxes to induce gamers to overspend? Those are essentially the questions addressed in this recent article by Simon Cordes (University of Bonn), Markus Dertwinkel-Kalt (University of Münster), and Tobias Werner (Max Planck Institute for Human Development), published in the Journal of Economic Behavior and Organization (open access). Cordes et al. identify two key features of loot boxes. First, the odds of getting top rewards are often censored. They explain that:
As a specific example, consider the football simulation FIFA Ultimate Team, where gamers build a team of players that vary in strength. Gamers can buy packs that offer lotteries over players. The odds, however, are provided, if at all, only for a coarse set of intervals, bunching together players of very different strengths... At the extreme, the worst player in an interval is around 1000 times less valuable than the best player.
Second, gamers receive highly selective feedback on the rewards that other gamers have received. Cordes et al. note that:
In the mobile game Raid: Shadow Legends... for example, gamers receive a notification whenever another player wins a rare reward... This feature leads to a constant but selected stream of signals about rewards from loot boxes. As only rare rewards are reported, this provides them with a biased sample of the reward distribution.
Cordes et al. use an experimental design to tease out the extent to which censoring and selective feedback are associated with willingness-to-pay for loot boxes. As they explain:
Subjects repeatedly state their willingness-to-pay (WTP) for different monetary lotteries with three potential prizes, one of which is zero. In a Control condition, we transparently describe the odds of the lotteries and do not provide additional information to the subjects. We assume that this Control condition identifies a subject’s true WTP, and define overspending relative to this benchmark. We implement three treatments that capture the features of loot boxes discussed above. In Censored, subjects only learn the total probability of winning a non-zero prize, but not the exact probability of winning the highest prize. In Sample, we provide subjects with the full prize distribution and a selected sample thereof; that is, they observe the five highest outcomes in a sample of 400 draws. Finally, Joint combines both: subjects observe the censored prize distribution and a selected sample thereof. This last treatment resembles the current design of loot boxes most closely. Notably, our experimental design eliminates all features of loot boxes that may provide utility beyond winning a reward, such as a nice design or visual effects. Instead, we isolate the features of loot boxes that almost certainly do not affect a gamer’s material utility and can thus be interpreted as inducing mistakes.
Looking at their results, based on a sample of 617 respondents in the UK recruited through Prolific, Cordes et al. find that:
...both features substantially increase the willingness-to-pay for lotteries. Censoring the odds of a lottery increases a subject’s willingness-to-pay compared to a baseline treatment. Also, simply providing subjects with a selective sample of the reward distribution increases their willingness-to-pay. Combining censored odds with a selected sample increases the willingness-to-pay by 100%.
This explains why game developers use these tools. Selective feedback increased willingness-to-pay by 43 percent, censoring increased willingness-to-pay by 45 percent, and the combination of censoring and selective feedback doubles gamers' willingness-to-pay for loot boxes. All three experimental effects were statistically significant. Why does this happen? Cordes et al. examine the mechanisms underlying the difference in willingness-to-pay. Specifically, they asked research participants before each lottery how often they would win the top prize in 100 draws. When Cordes et al. then look at the results controlling for beliefs:
...the average WTPs in Censored, Sample, and Joint do not differ significantly from that in Control anymore. It demonstrates that censored odds and selected feedback increase the subjects’ WTPs by inflating their beliefs of winning a high prize.
In other words, the difference in willingness-to-pay is entirely driven by a difference in the belief of winning a top prize. Censoring and selective feedback manipulate gamers' beliefs about the probability of winning, causing them to overestimate their chances and therefore making them willing to pay more for the loot boxes. That suggests a simple solution as well: if gamers are provided with more transparent odds of winning, then that might reduce overspending. However, Cordes et al. conduct a 'robustness' experiment where they provide gamers with more information, and find that:
The additional information significantly decreases the average (conditional) belief of winning the high prize compared to Joint (𝑝 < 0.01). While the WTP in Info is also slightly below the one in Joint, the effect is not significant at the 10% level (𝑝 = 0.69). Importantly, both the belief and the WTP are significantly higher in Info compared to Control...
In other words, the extra information does appear to change the beliefs about winning the top prize, but doesn't affect the willingness-to-pay for the loot box. To me, it seems that the research participants might have intuited what the experiment was about and demonstrated that by changing their stated beliefs. However, their 'true' beliefs, as captured by their willingness-to-pay, were unaffected
Cordes et al. conclude that:
Our results support a case for regulating loot-box design, but it is not apparent what regulation would be effective. Current plans for regulation in Germany include labels for games with loot boxes... However, our results show that the design of loot boxes, rather than the random rewards they provide, encourages players to overspend. Hence, this regulation may not be effective in reducing overspending. While it should be easy to enforce a transparent display of odds, it is not clear that gamers will use this information when making their purchase decisions. Our robustness experiment, for instance, suggests that additional information may not affect WTPs. Moreover, even when learning the full probability distribution over many prizes, gamers might not act on it because it is simply too much information to be considered. Instead, regulators must find ways of communicating the odds of loot boxes in an easily understandable way...
I'm not convinced. Providing information is a great way of addressing the problem, if people were fully rational. People are not fully rational. They don't incorporate all available information when making a decision. At best, as Nobel Prize winner Herbert Simon observed, people are boundedly rational. The probability of winning the top prize needs to be made more salient for gamers, so that they will focus on that. Unfortunately, 'quasi-rational' decision-makers are also affected by positivity bias - they tend to be overly optimistic about things to do with themselves, including their probability of winning a top prize, even when confronted with the true probability. So, even if the probability is made more salient, perhaps gamers wouldn't take it into account anyway. It's all very challenging, and perhaps the best way for governments to protect gamers from overspending is to limit the number of loot boxes that can be purchased, or some other regulation.
Of course, this research was just one study. Perhaps future research will identify some silver bullet solution to gamers' quasi-rationality when it comes to loot boxes.
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