Betting vs. the Nuclear Option
By Bryan Caplan
I have a long-standing dispute with Tyler Cowen about the epistemic value of betting. To my mind, my position is modest: Bets advance our knowledge by clarifying contentions and raising the price of error. While isolated bets don’t “prove” anything, they tip the argumentative scales in favor of the winner. And a long track record of successful betting is a strong sign of reliable judgment. Furthermore, the refusal to make bets at all shows that deep down, you know that you don’t know what you’re talking about.
In contrast, Tyler’s position is extreme: Bets have zero epistemic value.
Why would he think this? While Tyler has multiple arguments against the epistemic value of betting, his “nuclear option” is just “If you’re so foresighted, why aren’t you the proud owner of a successful hedge fund?” Instead of betting your friends that the unemployment rate will sharply fall in a few years, why haven’t you mortgaged your home to buy the S&P? (Better yet, buy option contracts that only pay if the S&P sharply rises). I’ve already heavily criticized this argument, but now I’d like to share yet another reason why Tyler is deeply mistaken.
Suppose I say, “Unemployment will fall to 4% by January 1, 2022.” You say I’m wrong – and use Tyler’s nuclear option against me. “If that’s right, you should leverage every penny you can on the S&P.” Sounds good, right?
Think again. It’s totally possible that the market already agrees with me! The current level of the S&P could be exactly the level you’d expect if the unemployment rate were destined to equal 4% on January 1, 2022. If so, my claims about unemployment and my disinterest in buying stock options are fully consistent.
In sharp contrast, it makes no sense to simultaneously hold my view on the path of unemployment and refuse to bet on unemployment. Why? Because as long as I’m right and you disagree, I will profit.
I don’t need to worry about “what the market has already figured out.”
I don’t need to understand a thousand other factors that influence the S&P.
I don’t need a Theory of Everything.
As long as I genuinely know one disputed fact about the future, and my opponents are intellectually honest, they will bet me and I will take their money.
End of story.