June 16, 2005

Weather Betting

Prediction Markets By: ams

James Annan, the
climate scientist I blogged about earlier, is at it again. He is in the mainstream on the global warming question. AFAICT, that’s pretty unusual for someone who is

loudly
challenging
others to stake their reputations on a specific bet.
Usually, people out of the mainstream use this tactic in order to
get some visibility for their unusual position.

The debate seems to have three factions: Skeptics, Alarmists, and the
mainstream. The mainstream is represented by the

IPCC report
(which Annan agrees with). The Skeptics believe that the IPCC report
is an extremist statement because it presents the alarmist view and
the mainstream together without preferring the less extreme scenarios.
There’s some disagreement about the roles, though. Annan thinks that
the two interesting positions are those who agree with the IPCC, and
those who think it is overly alarmist, while

Chip
Knappenberger
(characterized by Annan as a Skeptic) thinks that
he and Annan are in agreement as to the likelihood of the rate of
(near) future temperature change, and proposes that they should work
together to bet against “the alarmists – those folks who entertain the
idea that the IPCC extreme temperature change scenarios are the most
probable.”

Annan started this particular brouhaha when he noticed that Richard
Lindzen
forecast that over the next 20 years, the climate is as
likely to cool as warm, and said he would be prepared to bet on it.
When Annan

tried to arrange a specific bet, Lindzen insisted on 50:1 odds.
At that rate, Annan didn’t see any upside to the bet. Annan’s
characterization is that when Lindzen quotes odds that are that
steeply in his favor, he is saying that he doesn’t have much
confidence in his views. (I think he is precisely correct on this
point. When I’m confident of a position I give my opponent odds so he
is incented to take the bet.)

Anyway, this is the kind of conversation that I think Prediction
Markets encourage. There’s a public debate going on about global
warming, and in the popular press it’s hard to tell what each side
actually believes and with what confidence. In order to have a bet,
the two sides have to agree on what the terms are, and agree that they
disagree on some specific prediction. They can disagree on the odds
that some specified outcome will occur, or disagree on the value of
some measurement that can be taken at a specified date in the future.
In either case, there’s room for a bet. The best bets leave each side
believing that they are getting better than even returns.

Annan

makes this point repeatedly, and shows that he is

looking for
the kernel of the disagreement so he can create a bet that the other
party will see as advantageous. He then points out that someone who
gives odds for some event in a paper that will be referred to by the
media and by politicians when making policy decisions they should be
certain enough of the numbers to back them up with their own money, or
there’s little sense in claiming that they represent the advocate’s
best estimate.

Once a bet has been made, particularly if it’s done in a context like
a prediction market where the odds represent the opinions of more than
two antagonists, the odds and the prediction are publicly visible, and
everyone gets a better idea of what the divergent views are.

AFAICT, all of the arguments made in the discussion about the value of
betting were dealt with by Robin
Hanson
in his earliest papers on Idea Futures.

Some examples:


  • uninformed betters
    (The existence of profit potential will draw in
    more informed betters and give an incentive for contrarian research.)


  • long time frames
    for results. (Robin suggested that the bet’s
    values could be stated in terms of a market-neutral instrument like
    T-Bills or the S&P 500. This would mean that the money held against
    the bet would appreciate like any other investment.)


  • Manipulation
    (Robin has done recent

    experimental and

    theoretical work to
    show that manipulators increase the returns and incentives for betters
    to move the market in the correct direction.)

  • blog

  • companies & initiatives

  • April 2019
    M T W T F S S
    « May    
    1234567
    891011121314
    15161718192021
    22232425262728
    2930  
  • archive

  • categories