Finance for Neopians

There have been many articles written on the subject of earning Neopoints. I've read articles on the subject of running a shop, becoming an effective trader, or maximizing your score in various games.

In this article, I would like to take a more abstract, high-level view on economics in Neopia, and what it means for those of us who wish to become wealthier than we are now.

In particular, I would like to take a look at three different concepts that help us understand wealth in Neopia. These three concepts are: Interest rates, Markets, and Opportunity Cost.

Section 1: Why Collecting Interest is in your Best Interest

There are plenty of good reasons to keep your money in the Neopian Bank.

For one thing, it is a secure place to keep your money from being stolen. I have heard some users argue that, since the Pant Devil steal enough money to give you a negative on-hand amount of Neopoints, there is little to no point in keeping your money in the bank, since this means that the Pant Devil is effectively stealing from your bank account.

This is true; however, the Pant Devil is not the only villain you need to be wary of. There is also the Tax Beast. While the Pant Devil takes a flat amount of Neopoints from you, the Tax Beast takes a percentage of what you have on-hand. The more you have on-hand, the more the Tax Beast can steal. If you carry millions of Neopoints around with you, this means the Tax Beast can steal hundreds of thousands of Neopoints out of your fortune, all at once. But if most of your money is in your bank account, and you only carry a few hundred or a few thousand Neopoints with you as you travel Neopia, this reduces what the Tax Beast is capable of stealing from you.

In addition, having a bank account entitles you to an amount of daily interest, based on how much you have saved. This is free money you can get once per day, provided you click the "Collect Interest" button before you deposit or withdraw funds.

The interest you collect is not very much: with 10,000 Neopoints in a Super Gold Plus account with 7% annual interest, you gain only 2 Neopoints per day. If you have 10,000,000 Neopoints in an Ultimate Riches account with 12.5% annual interest, you gain 3,425 Neopoints per day. It's not a fast way to get rich, but it is reliable, and it's easy. How can you possibly turn down free money at the press of a button once per day?

You have probably heard the saying "it takes money to make money". This is true in Neopia, and collecting interest in a bank account is just one of many ways to use the money you have to make more money. You will doubtless come across many other money-making opportunities: perhaps you will open a shop, or come across a hot stock tip, or come across a good trade in the trading post. In any of these cases, it can be a good idea to take out a calculator and consider whether this opportunity is worth the trouble.

Suppose you have 100,000 Neopoints. There are plenty of things you could do with that cash. Let's consider two options: you could (1) Put it into your bank account and earn at least 25 Neopoints per day, or over 9000 Neopoints in the next year, in the form of interest, or (2) Invest it in upgrading your shop, and perhaps buying a few new items to sell in your shop. If you choose option (1), you can be certain that you will have at least 109,000 Neopoints in your bank account in 1 year. Option (2) is more complicated, and it depends highly on whether your shop upgrades end up being useful or whether you make a profit on your items. If you believe that option (2) will get you up to at least 109,000 Neopoints in the next year, then it might be a good idea. If not, then you might as well just leave it in your bank account.

In conclusion, your bank account is a secure place to store your money, and a small but reliable source of growth.

Section 2: This Little Snorkle went to Market

When you imagine the most fascinating places in Neopia, you might think of the wild jungles of Tyrannia, or the picturesque Brightvale Castle, or perhaps the magical Faerie City. Personally, I think one of the most fascinating places in Neopia is the Marketplace. The Marketplace is not just a place to buy things: it's a complex system that reflects the combined decisions made by a large group of people.

Some people say that there is one price for everything, and that is what everybody pays. This is not quite true: a brief search of any item in the Shop Wizard, the Auction Genie, or in the Trading Post, shows that different people are willing to accept slightly different amounts for the exact same item. We all have our own goals which affect how much we feel each item is worth: if you don't care about training your pets for the Battledome, a codestone isn't worth very much to you. If you care a lot about dressing your pets fashionably, then a cool new article of clothing will be worth a lot to you.

Consider, for example, an Orn codestone. When you get every Neopian together, each of them has an amount they believe the Orn codestone is worth. Suppose Amy the Acara finds an Orn codestone on the floor. She isn't interested in training for the Battledome, so this codestone is worthless to her.

Bill the Blumaroo, on the other hand, wants to train at the Mystery Island Academy -- he just needs a single Orn codestone to pay for his next lesson. This Orn codestone could be worth as much as 9,000 Neopoints to him.

Cyril the Cybunny owns a shop in Neopia. He meets Amy the Acara and notices that she has a codestone. He offers her 3,000 Neopoint for the codestone, which she accepts, since she found it on the ground and has no use for it. As luck would have it, Bill the Blumaroo hops by and notices that Cyril has an Orn codestone for sale, which is exactly what he needs. Cyril says he's willing to sell it for 6,000 Neopoints. Bill accepts this offer: he would have been willing to pay up to 9,000, so 6,000 is a bargain as far as he's concerned.

Note that all three Neopets involved in this transaction (Amy, Bill and Cyril) have each, from their own point of view, profited by 3,000 Neopoints.

And yet, things rarely seem to work like this in reality. In practice, items do seem to have relatively stable prices. For example, when I search for an Orn Codestone using the Shop Wizard, the average price I get hovers around 2,800 Neopoints. Why is this?

The answer is that the market is not just made of up Amy, Bill and Cyril: it is made up of every single Neopian who has ever spent or earned a Neopoint.

When you see that an Orn codestone sells for 2,800 Neopoints on average, it certainly doesn't mean that every person thinks it's worth exactly 2,800 -- almost everyone values it as being worth either more or less.

In fact, for any item and price, you can divide people into four groups:

(1) People who have item and would sell it at less than price.

(2) People who have item and want to sell it for more than price.

(3) People who don't have item, but would only buy it at less than price, and

(4) People who don't have item, and are willing to buy it at more than price.

So, when you see that Orn codestones sell for 2,800 Neopoints on average, that basically means that 2,800 is the price at which the members of group (1) and group (4) have cancelled each other out, leaving only groups (2) and (3). It is where the price reaches equilibrium.

We would all love to be like the entrepreneurial Cyril the Cybunny, buying items at a low price and selling them for a higher price. This is known as arbitrage. Arbitrage is the act of buying something from person A (for example, Amy the Acara) and immediately selling it to person B (for example, Bill the Blumaroo) for a profit. Unfortunately, in a market as big as Neopia, arbitrage is a very rare opportunity indeed. You'll occasionally find someone selling a codestone for 1 Neopoint, or someone who will spend more than necessary to buy an item (perhaps for a Faerie quest), but these are exceptions to the rule, and the rule is that arbitrage is a very rare opportunity.

As a corollary: If an opportunity seems too good to be true, it usually is. If a money-making opportunity exists, you can count on someone taking that opportunity as quickly as they can.

In Neopia, there is one prominent exception to the "no arbitrage" rule, and that is the official Neopian shops, such as the Food Shop, the Book Shop, and so on. These are the stores not run by users, but run by the site automatically. The prices these items are sold at in the official shops rarely correspond exactly with their prices in the Marketplace. Either the price is much higher than in the marketplace (in which case, the items usually stay in stock for a long time with nobody buying them) or the price is much lower than in the marketplace (in which case, users quickly purchase them and sell them for a profit in their own shops).

If you run a shop or have read articles about running a shop, you might already be familiar with the act of buying something from an official Neopian shop and then selling it for a nice profit. You may have heard it called "restocking". It is a common way for users to make money through their shops. Looking at it while knowing about arbitrage helps us understand why it's profitable, but also why it's so difficult: if there's a money-making opportunity, chances are that somebody is going to snap it up quickly.

Section 3: Limited-Time Opportunity

I'm going to introduce a new term: "Opportunity Cost". Whenever you make a decision to spend Neopoints on something, you are simultaNeously choosing NOT to spend it on a variety of other things. If you choose to keep 1,000 Neopoints in your bank account, you are choosing not to invest it in your shop; if you choose to invest in your shop, you are choosing not to play the stock market; if you choose to play the stock market, you are choosing not to buy a new outfit for your pet; and so on.

But the concept of opportunity cost has larger applications. In this article, I have focussed mostly on earning and spending Neopoints. That's because Neopoints are quantifiable and easy to talk about. However, in our daily Neopian lives, we exchange all kinds of resources, not just Neopoints. We trade things in the trading post, we exchange neggs at the Neggery, and we use dubloons on Krawk Island. But there's one resource we spend constantly which we can't get back: our time.

We can spend our time wisely, or we can waste it. If your goal is to get a lot of Neopoints, it stands to reason that you should focus on methods that gain you Neopoints quickly, rather than slowly.

For example, suppose you have one hour of time to do whatever you want to make Neopoints. One option would be to spend some time in the Game Room playing games; if you're good at a few games and spend some time practicing at others, it is quite possible to earn 10,000 Neopoints or more in that hour. If you pick fun games, it can be an enjoyable experience as well, and if you pick games that challenge you, you can improve your skills, possibly even earning a trophy and the daily 750, 500 or 250 Neopoints that come with it for the rest of the month.

Another option would be to spend that hour looking for a deal on an Orn codestone using the Shop Wizard, Trading Post, or Auction Genie. It's possible that you'll immediately find a codestone for 1 Neopoint, but it is unlikely that you'll find more than one such amazing deal per hour. More likely, you'll find that most of the prices are close to 2,800 Neopoints (or whatever the typical price is at the time you read this article). This would be a very monotonous experience, and you would be unlikely to gain more than 10,000 Neopoints in the hour. This suggests that, unless you enjoy the monotony of finding a deal on one item, you're better off playing games in the Game Room.

Obviously, there are more than two ways to spend your time. You could also spend the hour waiting for official Neopian shops to restock, and snatching up good deals as soon as you see them. You could spend it researching the prices of various items, possibly retired items whose prices you think are likely to go up over time. You could spend it looking for good trades or auctions. You could spend it writing something for the Neopian Times, or drawing something for the Art Gallery.

My point here is not to tell you what to do, but to give you a way of thinking about your decisions, especially when it comes to gaining Neopoints: whenever you make a decision, you are implicitly foregoing all the other choices you could have taken. I believe it's worth taking some effort to spend your time on pursuits that are profitable and, moreover, fun -- after all, when you get right down to it, this is a game, and we're all supposed to be here to enjoy ourselves.

Conclusion

I've done my best to introduce three financial concepts and explain how they apply in Neopia.

First, I argued for the importance of using the Neopian Bank, both to protect your cash and to earn interest. The interest isn't much, but it's reliable, and it gives you a frame of reference for anything else you do with your money: if what you're about to invest your money in doesn't earn at least as much as you'd earn by leaving it in your bank account, then it's not a good investment.

Second, I introduced the concept of a market, which is basically a bunch of people buying and selling things at whatever price they want, but which ultimately results in one relatively consistent price for each item. The market makes arbitrage almost impossible, except in unusual cases like restocking at the official Neopian shops.

Finally, I introduced the idea of opportunity cost, which generalizes the logic we use for money to other resources, especially time. It is important to use your time wisely, both to earn as many Neopoints as you want, and to make sure the time you spend in Neopia is time enjoyed.

There is plenty of overlap between these ideas. For example, when you choose to put your money in the bank in order to collect interest, or to take it out of the bank to invest in your shop, you're taking on an opportunity cost. But mostly, what they all have in common is that they will help you to understand the way Neopians behave, how the Neopian economy works, and your place in the Neopian economy, a little bit better.