Friday, April 13, 2012

Putting Your Money Where Your Mouth Is

Robin Hanson touches on euvoluntary exchange without intending it. Is gambling euvoluntary?

Many of the arguments trotted out by opponents to betting markets are reminiscent of knee-jerk reaction people have to rising prices (gouging). Their moral intuitions are all wrapped around their hippocampuses, making rational thought about the consequences of trade or failure-to-trade very difficult consider.

People speculate without cash all the time, and I suspect it’s when we introduce cash that we trigger these moral intuitions about gambling. Talking is OK, but if you make talking expensive, that’s wrong.

My wife has a cousin that’s convinced we’ll run out of potable water in this country within the next 10 years. We had a fun conversation about scarcity and stewardship, and how entrepreneurs solve problems when they spot an opportunity for profit, but he wasn’t buying it. I was running out of rhetorical ammunition, so I just invited him to accept a wager:

I’ll give you even odds that the price of water won’t increase to $1 per gallon by 2020.

Now, this is quite generous. He sounded very convinced we were in dire straits, and we didn’t know it. He should have given me 5:1 odds, but I offered him even. If we “run out” of water, the price of water per gallon shouldn’t have an upper bound, except that imposed by consumers' ability to pay. A dollar is affordable, no? This should have been an easy win for him.

He wouldn’t buy that contract for $1,000. I didn’t ask for any less, because I wanted to make a point. When his own resources were at stake, he wasn’t certain of his own claim.

I’ll spare you more examples, but I won’t spare you the cliché: talk is cheap. Why should making talk expensive be banned, in any context?

This isn’t our typical exchange scenario, or is it? You might say no, since one party in a wager must lose. But, we allow consenting adults to engage in all sorts of speculative behavior in financial markets. What makes betting on an election outcome any different?

Let’s examine the conditions for euvoluntary exchange, and whether gaming violates them:

  1. Conventional ownership

    Each bettor owns his own cash. I think it’s obviously that we’re free to divest ourselves of our own cash.

  2. Conventional capacity to buy/sell

    What is being purchased with a gamble? The right to someone else’s resources in the future. Information is created as a by-product, but that isn’t what is being sold. If I bet you that Obama will win the next election, and you take the wager, it’s simply a symmetric contract that allows you to appropriate my stake if Obama loses, and it allows me to appropriate your cash if he wins.

  3. Absence of regret

    This is a tricky one. The loser of a wager may regret making the wager after all contingencies have been resolved (Obama wins or loses). But is this right time frame for regret? I posit that the “absence of regret” criterion for wagers is only binding before contingencies have been resolved. I’m having a hard time thinking of a wager I’ve regretted before I found out I lost.

  4. No uncompensated externalities

    This is probably the one we’re violating. But isn’t this the one we always violate? The problem is that “meddling externalities” exist all over the place! Our Paretian box is too damn small! The fact is, people don’t like it when other people gamble, because people like to have a say over how others' live their lives. Gambling creates a negative externality for these people, the psychic cost of enduring living in a world where drugs gambling is allowed.

  5. Neither party coerced by human agency

    Bets entered into by consenting adults is not coercive.

  6. Neither party coerced by circumstance; the disparity in BATNAs is not “too large”

    We’re trading claims on future resources, or promises. The alternative to not betting is the opportunity cost of my stake. We can imagine stakes from both parties being put into escrow, though usually this isn’t required. The alternative to not putting my cash in a vault is that I get to keep it. The horror!

If I could wave my magic wand (economists call them “hands”) and make meddling externalities count for zilch in Pareto or Kaldor-Hicks analysis, I would, because they’re a huge impediment to making marginal improvements. I’ll call this “plausibly” not euvoluntary.

But is gambling just? With apologies to my wife’s cousin, the world could do with a little less cheap talk. Wagers produce information, which is actionable, and can be trusted to a greater extent than cheap talk since the talkers have something to lose. If we don’t let the Itinerant Padre move goods around, prisoners are worse off, and resources are wasted. If we don’t let people gamble on real-world events, information is constrained locally, or worse, transmitted through a medium (rhetoric) which corrodes its value.

What do you think of my analysis? I haven’t entirely sold myself on absence of regret; what’s the proper timeframe for allowing for regret with wager?

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1 comment:

  1. So two concerns come to mind (and this may be in response to concerns I've had for years about this betting point - not necessarily your rendition of it):

    1. What does this really do except for shame people who talk too loosely? That's valuable, certainly - but maybe the costs of shaming them are worth considering. Certainly going around challenging people to bets isn't going to help one's social life: we may not see betting of this sort because it actually doesn't pass the cost-benefit test.

    2. One reason why it would be good - as you point out - is getting out good information. Maybe. But I've found that some of the wisest people out there (in other words, the people whose information I trust most) are the most circumspect about how certain they can be in their views. In other words - the people you'd want information from may be the least forthcoming in the market.

    I don't think I'm burdened by the moral outrage over betting that you describe at the outset. I think there are decent reasons to wonder about this. You're probably going to get bets on things that wise people are confident about, and you're probably not going to get unwise people to bet on them (just like you experienced on the price of water). So basically you're going to have a lot of confident, smart people offering bets on an argument, and a lot of people not willing to accept the bet.

    What does that tell you that the current way we manage scientific/expert consensus doesn't tell you already? Isn't that how scientific consensus works already?


Do you have suggestions on where we could find more examples of this phenomenon?