Betting markets.

[Vendetta21]

I have been playing a game for about three weeks now, where I try to get people who have interesting opinions about the outcomes of the presidential election to bet on their opinions.

For many different reasons, people think it is possible that Obama will loose the presidential election, and I try to get them to bet on that at ridiculously inflated odds. Anywhere between 1 to 15 to 1 to 50, and I've only gotten 1 person, and he only bet a dollar.

People have this fear that Obama won't win and they are willing to let that fear pervade their life but they aren't willing to treat it as substantial, i.e. I can't get a scared Obama supporter to bet 50 to 1 odds that McCain will win. RIDICULOUS odds and they won't bet on them. Why? Because they, on a deeper level, know that he is going to win, but still fear that he will lose.

This brings the idea of betting markets into play, and how they help us illuminate what we really rationally believe in versus what are just the whims of our hopes and fears. If you really believe something to be true you'd be willing to bet on it, and it wouldn't matter the odds because you know you would win.

Those that are afraid Obama won't win and feel their fears substantive should bet on it. Those that hope Obama won't win and think their hope substantiated should also bet on it. Right now you can get 7 to 1 odds at InTrade on McCain. I'd give you even higher odds.

It's just an interesting cultural phenomenon that we aren't willing to treat our own beliefs as substantial yet we are willing to allow them to pervade our life much more than necessary.

[QED Stepfiles]

The thing is that people are generally risk averse. I think that it's not really that people aren't confident in their own beliefs, but just would rather not take risks on betting on something that is not 100% certain. For example,

Say I offered you a game. You an only play once. I will pick a number from 1 to 10, and you have one guess to correctly name the number. If you lose, you give me $1,000,000. If you win, I give you $1,000,000,000,000 dollars. Would you take the bet?

Rationally speaking, it's an UNDENIABLY good decision to take me up on the offer. Statistically, your expected winnings are phenomenally high. Yet, I doubt you will be able to find one person who wants to take the bet. The reason is pretty clear - even if you have a chance of having that trillion dollars, the cost of losing the $100,000 is much more daunting. This is a general phenomenon - people will believe one thing but you won't be able to get them to bet on their beliefs, since beliefs are equivalent to strong opinions, and no opinion is guaranteed to be correct. I guess that the punch line is that people are not rational in general, but you can't really blame them for it.

So I don't think it's that people are not willing to treat their beliefs as substantial, but rather that people are just aware of the fact that their belief, ultimately, is just a belief (albeit substantial), and is not some concrete truth.

[Vendetta21]

Originally Posted by QED Stepfiles

Say I offered you a game. You an only play once. I will pick a number from 1 to 10, and you have one guess to correctly name the number. If you lose, you give me $1,000,000. If you win, I give you $1,000,000,000,000 dollars. Would you take the bet?

The difference here is that I'm not setting a buy-in price, just odds, so the person could bet a price in their range, such as $5, and if they win get a return of up to $250.

I think moreover what I'm trying to say is that people who want Obama to win can't stop being scared that he won't. I'll bet the media has something to do with it, but pretty much my point was just a specific commentary on the nature of worry.

[lord_carbo]

Originally Posted by QED Stepfiles

The thing is that people are generally risk averse. I think that it's not really that people aren't confident in their own beliefs, but just would rather not take risks on betting on something that is not 100% certain.

The whole point of a betting market is that you bet money until the probability, which is equal the price per share, is what you think it should be, adjusted of course for diminishing returns in utility (as a function of income), uncertainty in your ability to predict, and budget restraints. So if you truly trust your probabilities-- and they are right, mind you-- then on average if you bet until the margin, you will gain money. If McCain is 7:1 and you think he actually might win, you're a fool to not invest at least $10 into some shares. (Personally, if I were 18 or older, or if I just had a Paypal and the willingness to lie about my age, I would have invested into a ton of shares in Obama's Intrade market when he fell below p=.50; I thought it ridiculous when it happened! But I support neither Obama or McCain; I'm just a guy who is confident in his ability to predict how people vote.)

The real problem is that people are truly uncertain of their probabilities. They just don't want to admit it, because their claim that McCain will win the election is based off political bias, not dispassionate analysis.

Your example doesn't take into account utility as a function of income. People who already have multiple millions of dollars... their last $1,000,000 million probably doesn't mean that much to their overall utility as compared to another $1,000,000,000,000, so they'd take the bet. In layman's terms, a person with $1,001,000 has a lot to lose in terms of his overall well-being than a person with $10,000,000. The latter person is much more likely to take your gamble. And hey, if I had about $3,000,000, I would probably take that gamble, for my gain in utility would probably be at least nine-fold as compared to my loss, which beats the 1:9 marginal utility ratio I would need to take the bet and still be a rational agent.