|Putting your money where your mouth is
||[Nov. 15th, 2009|01:22 pm]
I often marvel at the human capacity for self-deception, one aspect of which is the fact that people often haven't a clue what they really believe. There's no better way to demonstrate this than to get them to bet on something they claim to be a sure thing.
Dick Lipton tells the depressing story of trying to get another prominent computer scientist (Ken Steiglitz) to bet on P != NP. Steiglitz started out claiming the odds were a million to one, but when forced to bet, he wouldn't take odds longer than two to one.
Two to one. So a respected scientist was 500,000 times less certain of his opinion than he claimed to be — on a question that was within his sphere of competence. What does that tell us about the certitude that we each feel on issues relating to the economy or the environment? We're simply lying to ourselves.
A few years ago, when intrade was popular, I went around asking people why they weren't cashing in by betting on their 'sure' beliefs. If they were right, they could double their money in mere months. It was amusing to listen to people's rationalizations and excuses.
I think it would be fun exercise to bet on one's views, regardless of whether one feels certain of them or not.
Surely it's within human nature to be more careful with your own resources than with others' resources -- or to be careless when offering others "sure" advice.
People are highly risk averse.
Even if something were provably million-to-one, I wouldn't risk losing a million dollars (if I had that much to lose) just to make a dollar. Heck, I wouldn't even risk losing 500k just to make that dollar. That would not change my belief that the odds were million to one, if the proof were correct, however.
The million-to-one aspect is a red herring, in retrospect. I can accept that someone might not want to risk losing a million. But I'm not able to accept that as an explanation for not wanting to take (say) 10:1 odds if you truly believed the odds were a million to 1.
But betting is an exercise in risk analysis/risk tolerance. I could for example surmise that the odds of someone running down my street naked in the next hour are, let's say, 100,000 to one, but I would never give you those odds because that's $10 million payout for me on a hundred dollar bet. The odds of it happening are low, but in my eyes, the risk is still very high because if it does happen the outcome is catastrophic.
Please see my response to the comment above.
Suppose I offered you this deal: Bet your last $100 and roll a die. If you roll 1 or 2, the game is over and you lose. If you roll a 3, 4, 5, or 6, you get your $100 plus $100+$1.50 from me, and you can play again if you're willing to wager all of your money against $1.50 more. On each roll, you have a positive expectation of $1. The "rational" thing to do is to keep playing. Yet, at some point, that $1 is dwarfed by the potential of ending up penniless. In the million-to-one odds case, it is dwarfed from the start.
If I really believe the odds to be 2 million to 1 that P=NP will not be proven in 10 years and I bet you at 1 million to 1, then my expected ROI is just under $.50. Even if I will have a spare $1 million in ten years, is it really "rational" to put in $1 million to get out $0.50? Maybe. To get out $0 or $1,000,001? I don't think so.
If I had spare billions and billions... And, I could execute millions of independent 2 million to 1 bets at 1 million to 1 (and, I can't find a better ROI out there), then sure it'd be a good way to make money. I don't forsee either having the spare billions or being able to execute millions of such wagers.
Please see my comment above.
(You bring up utility theory, which is related to but not the same as the risk aversion argument. In response to utility theory, let me make the additional point that it doesn't apply at all to betting on intrade, because the odds you're betting on are usually close to 1:1.)
Is intrade really significantly less popular than it used to be? What do you base that on?
I have no idea. I said that because I hear a lot less about it. But that doesn't affect the argument I was making.