I Win My Long-Run Gas Price Bet
By Bryan Caplan
In July of 2008, the average U.S. price of regular gasoline was $4.062. As usual, global hysteria followed. And as usual, I was unperturbed. So unperturbed, in fact, that I made the following bet with Tyler Cowen and David Balan:
I will bet $100, even odds, that the U.S. price of gas (including taxes)
in the first week of January, 2018 will be $3.00 or less in 2008
A subsequent clarification specified that the bet was on the price of regular gasoline.
Today, the January CPI arrived, allowing us to finally resolve this ten-year bet. In 2008, the US CPI stood at 215.3. In the third quarter of 2017, it hit 244.7. Since then, there has been further inflation of 0.3%, bringing us to 245.3, for a grand total of 13.9% inflation during this period. For me to win, then, the average price of regular gasoline in January 2017 must be less than $3.417.
So where are we now? In January of 2018, the average price was a mere $2.555. I have therefore won this bet by a margin of over 25%. (Indeed, even if we count all gasoline, the average price is only $2.671). I would have prevailed if there’d been 0% inflation – or as much as 14% cumulative deflation.
Now what was this bet really about? Back in 2008, Tyler argued that there was a deep intellectual error in the work of Julian Simon:
It’s amazing how much, on this issue, some people resort to what can
only be called technical analysis — inferring future price movements
from past trends — when they would scoff at that approach in almost any
Why was Tyler so dismissive? As far as I can understand, he thinks that basic arbitrage theory implies that there can’t be predictable price patterns. My view, in contrast, is that there are many conditions that undermine the power of arbitrage. So if we see a 150-year price pattern, it’s perfectly reasonable to expect it to continue.
And what is that pattern for gasoline? For as long as we’ve had data, gas prices have shown frequent spikes, followed by gradual declines back to long-run trend. So when prices spiked to over $4.00, I expected the past to repeat itself. And repeat itself it did.
I expect that Tyler will insist that I just got lucky. And if I lost roughly half my bets, that would be a wise reaction. However, this latest victory brings my betting record to 17 wins and 0 losses. Yes, pride goeth before the fall. There’s at least one outstanding bet that I now expect to lose. Still, the only reasonable explanation for my 17-and-0 record is that my judgment is exceptionally good. As I’ve said before:
[T]wo key practices account for most of my success.
1. I take the “outside view.”
When predicting, I start with long-run averages, and presume the
“latest news” is distracting trivia. For example, when I made my
unemployment bet with Tyler, I looked at all the unemployment data for 1948 to the present, and assumed the future would resemble the past. As usual, it did.
2. I spurn hyperbole.
Human beings adore superlatives, but superlatives rarely apply to the
real world. So when I notice someone treating hyperbolic poetry as
literal truth, I rush to wager. For example, when John Podhoretz asserted that the Iran nuclear deal “effectively ensures that it will be a nuclear state with ballistic
missiles in 10 years,” I smelled hyperbole, and tried in vain to entice him put some money on it.
slogan form: I owe my track record to numeracy and normalcy. Step
back, calm down, look at the numbers, and target thinkers who say, “This
time it’s different.”
Last point: As always, my opponents have my respect – and deserve yours. They stuck out their necks and made clear claims. If every pundit would do the same, this would be a far better – and far quieter – world.
Update: David Balan asked me to post this comment:
I have paid Bryan the $100 that I owed him from losing this bet. And not only did I lose, I kind of “extra” lost, by which I mean that when I made the bet I thought I was very likely to win, and that it probably wouldn’t even be close (secular increase in demand from economic growth in China and other developing countries, etc.). So a very clear “W” in the record books for Bryan. (This is in contrast to the other bet that I lost to him, where I think the W should have an asterisk next to it.)