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Malthusian Dynamic Difficulty
What do you think about the concept? Do you see any challenges or pitfalls when implementing something like it?
The most common pitfalls for these games are the players them self.
People, similar to energy, takes the path of least resistance to there goal. If the population controls difficulty then players will find a way to manage the population, keeping the game at a difficulty where they can reach a personal goal while keeping the game easy.
This can resort in players missing content because they are unwilling to even try a new difficulty.
You can see this in games like Fallout vault, Dwarf fortress, Sims and State of decay.
Also working a mechanic like this into a game gives players a excuse to use it, to explain better I will point to State of decay.
A huge amount of players that play State of decay will say that the cars make the game too easy, they complain about it constantly. Yet driving the vehicles is optional.
When you point out that they could walk to there destinations, they say that driving is part of the game. They will often even claim that they only drive to places, never hitting zombies; even when they hold the highest score for road kill.
The largest pitfall is that players will exploit the game, that is why I think they complain so much over "catch up" mechanics and easy mode in Dark Souls; they know they will use it even if they don't like it.