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?

Related Posts

• Sam discusses gambling
• “An exchange of explicit cash consideration amplifies extant revulsion.”