Wednesday, July 3, 2013

Why not more betting?

By Charlie Clarke

Tyler Cowen is arguing with his colleagues Bryan Caplan, Alex Taborrok, and Robin Hanson about the efficacy of betting on beliefs.

What I'm struck by though, is why don't Bryan, Alex and Robin bet a lot more with each other?  If they disagree on 100 beliefs and 10% of those beliefs can be formed into bets, they should have 20 bets a piece with each other.

Here are some possible reasons:

The only one I can think of that doesn't undermine their argument for the usefulness of betting is

1)  Bryan, Alex and Robin hardly ever disagree.

      This statement seems pretty unlikely.  After all, they have regular and reportedly interesting lunches, presumably often discussing issues they disagree on.  There are many, many possible beliefs to have, so even if they only disagree on a small percentage of them, that's still a lot of absolute disagreements.

The most damaging argument is:

2) They don't really think the efficacy of betting is that high, that is a stated belief, but the lack of bets is a revealed belief that betting isn't very useful.

     Possible, but I think it's more likely that the reason is that betting on beliefs is quite difficult and often a suboptimal form of investing.

The most compelling reasons are practical problems with betting:

3)  Betting has high transaction costs.

    There is one group of professionals that regularly bet on all sorts of beliefs, professional gamblers.  It's incredibly common for the negotiation of the terms of a bet to be an excruciatingly long process.  It's not uncommon for the negotiation of a high stakes golf match to take longer than the round.  The most important part of the bet is the terms and the goal isn't just to make a profitable bet; it's to make the most profitable bet possible.

4)  Betting is low return and high variance.

    As a whole, the bets between the three bloggers must have 0% return, because betting is a zero sum game.  Thus, as a whole the bets are just adding risk/variance to their portfolios.  Perhaps, it's also adding a certain amount of fun (most people don't go to Vegas to win).  That fun might rapidly decrease with the number of bets in play, though if betting is primarily for fun, doesn't that dramatically devalue the argument for the efficacy of betting?

   Perhaps, they can each convince themselves that they have a 3% advantage.  Is it enough to justify betting?  If you used the Kelly Criterion, you'd want a $6800 bankroll for these $100 bets.  [Most people are likely too risk averse for Kelly and should have higher bankrolls.]

5)  Many disagreements aren't bet-able.

    Maybe Bryan, Alex and Robin disagree a lot, but those disagreements aren't conducive to making bets.  For instance, how could Tyler vs. the others bet on the efficacy of bets to reveal beliefs?  I could imagine gathering a large number of subjects and performing some sort of betting experiment, but even if they could agree on one potential experiment, running the experiment would be extremely expensive.

But if most disagreements aren't conducive to betting, it's hard to be optimistic about betting. If three people already totally convinced that betting is useful can't find things to bet on, how worthwhile is it to pursue the pro-betting agenda?

While this post probably seems like I'm trying to take Tyler's side, really, there is just a lot about betting I don't understand.  All of my biases favor lots of betting on beliefs.  As a pretty poor grad student, it's pretty easy to justify why I don't bet very much/often.  Yet, these are three tenured professors.  They should be willing to bet pretty large amounts on any belief they hold strongly.

Adam Ozimek argues that the key to betting is agreeing on terms, which takes a clear claim.  I agree that is a big part of betting, but then the bet itself is mostly ceremonial.  We might just assume bet $1 or "pride", and it mostly justifies all of Tyler's arguments that we are expressing a certain type of irrationality.  Most of the prominent blogosphere bets look ceremonial.  Bryan Caplan even argued that betting does reveal beliefs, because we are irrational, but is that a good argument in favor of betting or an argument he should strive to be more rational about his investing (like Tyler)?  

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