I’ve repeatedly debated with Tyler Cowen about the epistemic value of betting. Long before I amassed my 21-bet winning streak, I’ve argued that betting about substantive intellectual questions does all of the following:
1. Greatly improves the quality of our thinking by converting vague, ambiguous language into clear, specific claims.
2. Greatly improves the quality of discourse by incentivizing the rationally ignorant and rationally irrational to mute themselves.
3. In the long-run, creates track records that greatly enhance even casual observers’ ability to discover reliable thinkers and dismiss unreliable thinkers.
Tyler’s rebuttal has long been a variant on, “If you’re so smart, why aren’t you rich?” If you really know more than other people, you shouldn’t waste your time making bets. You should take your knowledge to financial markets and make a killing. Anyone who fails to do so isn’t really epistemically exceptional, no matter how many bets they’ve won.
For my part, I’ve always considered Tyler’s reply quite weak. Rebuttal to his rebuttal: Many major intellectual issues simply aren’t financially helpful to resolve. Suppose you could demonstrate that intelligent alien life exists in another galaxy. An amazing discovery, yet it’s hard to see why financial markets would care in the slightest. This wouldn’t be true, of course, if “Existence of intelligent alien life proven” securities existed, but they don’t. Even the best-developed financial markets focus on a tiny sliver of logical space. Exchanges fret far more about pork bellies than life extension. In any case, the world is so complex that you can perfectly understand a wide range of relevant issues but still go bankrupt investing on your knowledge. Suppose, for example, you knew exactly how much petroleum Earth contained. An amazing feat, but it’s far from clear that you could make money off of this knowledge.
At this point, you might reply, “Knowledge of a few facts won’t ensure riches. Still, anyone who knew a lot of important facts could easily become a billionaire.” Plausible, but is it true?
I fear not. Consider this hypothetical: Back in March, you acquired omniscient foresight for all of the following variables: The GDP of every country on Earth; the unemployment rate of every country on Earth; total spending by country on consumption, investment, government purchases, transfers, exports, and imports in every country on Earth; and the true coronavirus infection and death rates. Suppose that, armed with this godlike knowledge, you tried to predict where international stock markets would stand today.
What would you have predicted?
Personally, I would have expected stock markets to fall by at least 2/3rds, and remained around that low level. I’m not alone, as this Twitter poll shows:
If the Dow had crashed to 10,000 in March and stayed there, how surprised would you be?
— Bryan Caplan (@bryan_caplan) August 8, 2020
In reality, global markets have almost fully recovered. With 20/20 hindsight, maybe this will make sense, but I remain utterly confused. What I do know, however, is that omniscient foresight about a long list of macroeconomic variables wouldn’t have made me rich. Indeed, I could easily have lost everything; full of hubris in my god-like knowledge, I might have leveraged all my assets to short global markets. Only too late would I have found that omniscience is not enough. You can have flawless knowledge of the macroeconomy yet dangerously unreliable knowledge of the financial economy.
One could protest: “You could have made a killing if your omniscience extended to specific firms. Imagine if you perfectly foresaw how much people would start buying from Amazon.” That sounds right, but reinforces my main point. Namely: The market poorly rewards deep, accurate knowledge of the Big Picture. If you want to get rich, you’re better off knowing the right kinds of trivia.
Not convinced? Ask yourself: If you wanted to get rich, which would you rather know: The release date for the first coronavirus vaccine – or the name of the company that discovers this vaccine?
If you care about the Big Picture, when is obviously vastly more important than who. If you’re looking for a mountain of gold, however, who is vastly more important than when.
Last question: Isn’t it comically convenient for me to claim that I just-so-happen to have great knowledge of the Big Picture, but mediocre knowledge of how to become a billionaire? No, because the tournament to gain great knowledge of the Big Picture is much less competitive than the tournament to become a billionaire! The world is packed with brilliant people who desperately want to become fabulously rich. The quest to grasp the Big Picture, in contrast, is only a nerdy hobby. In a world where 10% of MIT and Caltech graduates devoted their lives and egos to public betting, my betting record would be lost in the shuffle. The reason I’ve excelled, in short, is that most of the thinkers able to out-run me neither know nor care that there’s a race.
READER COMMENTS
Atanu Dey
Aug 24 2020 at 11:49am
Perfect knowledge, paradoxically, is no knowledge at all — in the sense that you cannot do anything with that knowledge that would not invalidate the knowledge one has of the future.
Frank Knight’s insight — there’s no competition in perfect competition — is somewhat analogous.
Garrett
Aug 24 2020 at 12:21pm
And in financial markets, even God would get fired as an investment manager
robc
Aug 25 2020 at 4:33am
God, unlike Stalin, wouldnt stick to 5- year plans.
James
Aug 24 2020 at 3:01pm
Tyler’s criticism is surprising to hear from a professional economist, in that it incorrectly assumes a distinction between a bet and a financial transaction. The act of making a bet creates an OTC financial asset. The largest distinction is that most bettors risk their own money and only get paid if they are right. Finance people generally take risk with other people’s money and frequently get paid just for showing up.
Even if betting is somehow different from and inferior to running a portfolio of exchange traded assets there is still the question of whether betting is better than not betting at all.
zeke5123
Aug 24 2020 at 3:33pm
I imagine that means Cowen also thinks all other methods of identifying expertise or even knowledge (e.g., degrees, citations, fellowships, etc.) are also bunk? That is, most professors are not billionaires. Does that mean most professors don’t know much?
Jose Pablo
Aug 24 2020 at 5:16pm
Professors don´t know much. At least not about any topic that is relevant to become a billionaire and about very few topics that are relevant to become a well-paid professional (apart from helping you to get your first job).
https://press.princeton.edu/books/hardcover/9780691174655/the-case-against-education
In “Economics” the knowing of the professors is particularly abysmal from any “real-world-practically useful” point of view. Warren Buffett use to say: “If you have one economist in your payroll you have one economist more than you need”. Pretty sure it applies to “professors on this subject” too.
zeke5123
Aug 24 2020 at 8:34pm
I don’t disagree; more to the point of Cowen’s criticism could be applied to himself. Does he apply it?
Jose Pablo
Aug 24 2020 at 5:38pm
Popular sayings, the kind our grandmothers used to say all the time, have a very significant epistemic value (I don´t think Tyler would deny that and if he does, send Taleb his way!) and, still, they are pretty useless to outperform the market.
In any case I will argue that even a 21 bet winning streak has any predictive value about the outcome of your next bet. Since the outcome of the topics you are betting on follows a statistical distribution it will be equivalent to say that a 21 bet winning streak on a French Roulette has epistemic value regarding your knowledge on the “French Roulette Physics”.
Piece of advice: don´t bet all your riches on the 22nd bet based on this assumption
Mark Brophy
Aug 25 2020 at 4:50am
If you’re an economics professor and you believe that silver is better money than paper, why couldn’t you get rich buying an ETF of silver miners? Many people have done that this year.
Alabamian
Aug 25 2020 at 3:44pm
I think you’re grappling with the wrong implication of Tyler’s rebuttal. The important bit isn’t found in explaining why your knowledge of the Big Picture fails to deliver financial gain. The important bit is that your purported superior knowledge of the Big Picture is limited to domains where it does not deliver financial gains. Such domains are almost definitionally devoid of the structures and incentives necessary to “creates track records that greatly enhance even casual observers’ ability to discover reliable thinkers,” and the inferences that can be drawn from success in such domains is limited.
To reframe it and put it simply: successfully making bets of trivial amounts in a small illiquid market doesn’t imply epistemic exceptionalism.
billysixstring
Aug 25 2020 at 6:58pm
Bryan, not sure if you know about Brett Weinstein, but he is the creator of the Unity2020 campaign. He is claiming on his podcast that Joe Biden will not be the Democrat presidential nominee in November. Sounds like it could be an interesting bet.
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