
On the first day of 2020, Bryan Caplan won his EU bet (that no country would leave the EU by December 31, 2019.) That gives Bryan a record of 20-0 in his public bets. What should we make of that record?
The odds of someone correctly predicting 20 consecutive coin tosses is more than a million to one. Not all of Bryan’s bets are even odds, but a look at the list suggests that the average bet is close enough to even odds that the 20-0 record is truly extraordinary.
I’m not impressed if someone tells me that Joe Shmoe in Dayton, Ohio has outperformed the stock market in 20 consecutive years. America has tens of millions of stock investors, and thus you’d expect a few dozen to have “million to one” type investment performances, just based on luck.
But there are very few public intellectuals who have 20 bets on politics and economics, and who report those bets on the internet. Thus, unlike Joe Shmoe, Bryan’s betting record really is quite impressive. But how impressive? And why has he been so successful?
When I look at his list of bets I mostly see positions that I would also have taken, if I had been a bettor. I would have expected Bryan to have won about 16 of the bets, simply because he took the more rational position. Some bets were against people who predicted that something unusual would happen.
However, not all of his bets were against people making highly implausible predictions. There were clearly some bets that he might easily have lost, such as the prediction (in 2008) that gasoline prices would fall sharply over the subsequent 10 years. That might have been a loss if not for the fracking boom. He might have also lost his bet on the 2016 election, had a few votes switched in Rust Belt states.
In other cases, Bryan took advantage of the fact that people put too much weight on recent events, as when he predicted the GOP would retake at least one branch of Congress in the next 8 years, as a time when the Republicans were in a funk.
I am most interested in Bryan’s bets on macroeconomics. This is partly because he seems to share my views on key issues:
1. Monetary policy during the Great Recession was tighter than it looked, and hence unlikely to lead to high inflation.
2. During recessions, unemployment rises sharply due to the interaction between sticky nominal wages and demand (NGDP) shocks. Then wages adjust and unemployment falls back to the natural rate.
3. Recessions are unforecastable, thus during any given 2-year period the best forecast is no recession.
In my blogging, I’ve frequently criticized the view that the Chinese economy was about to fall off a cliff, due to reckless lending and malinvestment. These factors can cause recessions in small open economies that rely on international capital flows, but in big economies such as the US, China, and Japan, recessions are almost always caused by tight money. Because monetary policy errors are hard to predict, recessions are difficult to predict. China hasn’t had a recession in decades because reckless lending and malinvestment do not cause recessions.
If you don’t believe the market monetarist view of recent events, then it might have seemed sensible to predict that unemployment would remain high, or that inflation would surge due to all the QE. In my view, Bryan is winning his macro bets mostly because he has the correct model of the economy. I seem to recall that Bryan agrees with my view that sticky wages are the only way to explain temporary periods of high (involuntary) unemployment.
That’s not to say that the natural rate of unemployment cannot increase, indeed this occurred in Italy and France during the 1980s. Bryan might have lost his unemployment bets. But the US economy seems to have a much lower natural rate of unemployment. And there are cases when printing lots of money leads to high inflation, but if the bond market is signaling low inflation ahead, then QE programs are likely to be merely accommodating an increased demand for liquidity.
If anyone is frustrated with my unwillingness to bet on macro issues, I have a simple response; bet with the financial markets. My view of the future is the market’s view. If you disagree with me, then you disagree with the market. Anyone can bet against my “market monetarist” model any time they wish. The Keynesians who (wrongly) thought that the austerity of 2013 would drive the US into recession were quite free to sell the stock market short, if they had had the courage of their convictions. The Austrians who predicted high inflation could have bought gold and sold T-bonds short.
I hope this post doesn’t come across as me trying to minimize Bryan’s performance, or me claiming I would have done just as well. I do believe that I would have won most of my bets, say 16 out of 20. But almost certainly not 20 out of 20. Thus Bryan’s performance truly is extraordinary, even accounting for the fact that he tends to take the more “sensible” side of many bets. He’s also won a number of “difficult” bets.
READER COMMENTS
Richard Hanania
Jan 2 2020 at 11:00am
I like Bryan a lot, but you have to consider that he’s picking his opponents. Winning bets with even odds is impressive if you’re betting against the market or an expert consensus or something. Somewhat less so if you’re searching online for what seem like the dumbest predictions out there. He might just have a particularly good BS detector!
Scott Sumner
Jan 2 2020 at 8:12pm
Yes, I agree that a smart bettor would win all 20 bets much more often than a million to one. But it’s still pretty impressive.
MarkW
Jan 4 2020 at 8:49am
I like Bryan a lot, but you have to consider that he’s picking his opponents.
Definitely. He’s exploiting pundits. It’s a form of shooting fish in a barrel, but it has very good knock-on effects. Pundits gain attention by making striking, improbable (but also somewhat vague) predictions. They expect to gain far more reputation points from the occasional lucky correct prediction than they lose from all the failures (which they try to explain away by pointing to various hedges and conditions they carefully slipped into the original wording).
When Bryan offers to bet against those predictions the first thing that happens is that he forces them to be explicit about their measures and timing, and in the process of defining the bet, the prediction inevitably gets scaled way back. So in the case of the EU, his opponent was predicting that the EU would collapse very soon. But in the bet, the prediction was scaled back to merely one large country exiting by 2020 (which was much less than a collapse and much later than the pundit expected). And even then Bryan won.
The great thing about the 20-for-20 record is that it tends to make sensible predictions look interesting and bold predictions look foolish. Let’s have more of that please.
Brazilian guy
Jan 2 2020 at 11:45am
“Austrians who predicted high inflation could have bought gold”
Funny enough, both gold and bitcoin would have been good investments to have when Peter Shiff was like Greta Thunberg saying that the dollar would collapse and everything would fall. That is the problem with the “stock market bets”, you can still win even if wrong.
https://edition.cnn.com/2019/12/17/investing/best-worst-investments-decade-bitcoin/index.html
Mark Z
Jan 2 2020 at 1:16pm
#7 (his gas price bet) is I think his most impressive one. I remember in 2008 even some sensible people were predicting gas would stay above $4 from then on. Below 3 in 10 years, that’s a bet would’ve laughed at. I think at least a significant minority of his bets he had a good 1/4 or 1/3 probability of losing. I wonder if (or why) he was sure some of those ones would turn out in his favor.
Scott Sumner
Jan 2 2020 at 8:11pm
Yes, that’s basically my view.
KevinDC
Jan 3 2020 at 10:27am
I can’t recall Bryan’s reasoning on all of this bets, but I do remember what he said about the price of gas specifically. His reasoning was that the price of gas has a steady historical pattern – it slowly increases over time, with occasional short run spikes that eventually settle back down to the long run trend line after a couple of years. So his argument was that the high gas prices in the mid 2000s were just another one of those short term spikes that would settle back down to the long run trend, and he was right.
This is just of demonstration of the fact that, as Scott puts it, Bryan thinks “people put too much weight on recent events.” Recent events, especially as amplified by media outlets, are just the short run fluctuations of the moment, which are a lousy guide to understanding the world or predicting future developments. Hence another of Bryan’s adages – ignore the news, and study history instead. The cumulative development of events over the last century will be a much better guide to understanding and making predictions about the world than the attention grabbing headlines of the day will ever be. This seems like a pretty good heuristic to me.
Lorenzo from Oz
Jan 2 2020 at 5:23pm
He seems to have won the EU bet by a month. A close run thing. But still a win, even if it rests on Teresa May’s misjudgement (in calling the 2017 election).
And a very impressive record.
E. Harding
Jan 2 2020 at 7:21pm
“These factors can cause recessions in small open economies that rely on international capital flows”
Key word here is “open”. The fourth (by PPP)/fifth (by exchange rates) largest economy in Asia suffered a very severe inflationary recession in 1997 due to openness combined with high interest rates and low reserves.
Michael Sandifer
Jan 3 2020 at 1:18am
Yet, you don’t think the stock market crash in 1987 was reasonable, given what was known at the time, and you think stock markets may have been at least a bit overvalued at the height of the tech boom. These may be considered minor deviations from the view you express above, but they are deviations nonetheless.
I’d say you’re mostly, but not entirely market monetarist.
Kefa Simiyu
Jan 3 2020 at 3:27am
It could as well have been accidental that he got all his bets right. For instance, no one knew that May would bow out and step down as Prime Minister. Moreover, no one knew that Labor Party would lose terribly in the poll. https://econscholaruon.wordpress.com
Keenan
Jan 3 2020 at 11:18pm
Scott,
do you think it would be more impressive if Bryan risked substantial amounts of his own money on these predictions in open liquid markets, rather than 1 on 1 bets vs. other people? I agree his predictions are strong, but he is mostly betting against not smart people. If his model of the economy is more correct than most others, he could “prove” it by becoming rich trading currencies/global stock markets.
I don’t know Bryan so that may not interest him, but large liquid markets are the ultimate test. I trade large liquid markets myself, but nothing related to monetary policy unfortunately. I think the *strong* prior has to be that he wouldn’t have edge in liquid markets. Curious your thoughts, although I imagine they will be EMH related.
Scott Sumner
Jan 4 2020 at 1:40am
Yes, it would be more impressive. But what he’s done is still quite impressive.
Phil H
Jan 4 2020 at 12:50am
“reckless lending and malinvestment”
It’s still not clear to me that reckless lending and malinvestment have happened in China. There’s been a lot of real estate investment that hasn’t generated returns in the short term, but in the long term it does absolutely fine, because urban expansion is a given here.
(Example: where I live, they throw up malls, and they look horrible and empty for three years. Then, magically, they fill up, because the city has grown richer and more populous.)
There have been plenty of loans that failed – but that’s supposed to happen! In a marketized economy, some (relatively constant and predictable proportion of) loans will fail as well. And when you consider that China’s growth outperformed all comparable more-marketized economies over the last few decades, what basis do you have for saying there has been “reckless” lending? If anything, it seems to me that the models of other countries are getting it wrong.
Scott Sumner
Jan 4 2020 at 1:40am
Phil, You may be right, I am relying on what I’ve read. But surely Ordos and also the Binhai region of Tianjin qualify?
Phil H
Jan 4 2020 at 5:09am
Apparently Ordos is full these days! It’s been a while since I looked at the news on it, but there were definitely some stories to that effect last year sometime.
But more importantly, even if it’s not, I don’t see that as necessarily a case of bad investment (or rather, not worse investment than might happen in any economy). China is midway through the process of urbanising approximately one billion people, maybe more (a process that looks to be taking about 60-80 years). When underbuilding to the tune of, say, housing for a million people happens, it’s not very visible, because China mostly doesn’t permit slums to develop. When overbuilding happens, it sticks out. But I think both of these cases are unavoidable variation in the course of such a massive process. The kind of errors that a market would make as well, if the process were fully marketised. These investment errors are big, but they still seem to me to be in proportion.
bill
Jan 4 2020 at 7:51pm
Any opinion on his bet with the StandUpEconomist?
Comments are closed.