Bryan Caplan  

Euro Bet

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I made a wager this weekend while I was at a Liberty Fund conference in Chicago. Fellow participant Jeremy Rabkin of Cornell made quite a few predictions about the non-future of the EU that struck me as overconfident. When he assured me that the Euro could not last, I had to challenge him to a bet. After some intense haggling, we reached the following terms:

If France, Germany, and Italy remain on the Euro as of December 31, 2010, Rabkin owes me $20. Otherwise, I owe him $20.

Rabkin's initial pronouncement was so unequivocal that I argued that he should give me odds. He seemed certain, and I wasn't. But as usually happens when you challenge confident people to a bet, he demurred.

Some of my critics (such as) insist that financial incentives don't make our beliefs more rational. But isn't the refusal of the super-confident to give 10:1 odds exactly what my rational irrationality model predicts?

After we shook on the bet, Rabkin mused that he'd like to find another taker. My co-author Ilya Somin, who was also in attendance, lunged at the offer, so there's now a total of $40 on the table.

I'm far from sure that Somin and I will win, but I do think the odds are in our favor. My main concern, in fact, is that we'll forget the bet. Hopefully on January 1, 2011, I'll still be blogging, and one of my valued readers will make sure Rabkin, Somin, and I have settled up.

COMMENTS (13 to date)
Nacim writes:

Make sure to adjust it for inflation then.

Barkley Rosser writes:

The odds are way in your favor. This has been one of the favorite fantasies of a subset of libertarians and conservative economists in the US, that first the euro would never get off the ground (they lost that one big time) and now that it will surely fail. Do these people go to Europe at all? The only country that has mumbled at all about getting out was Italy briefly under Berlusconi, who is now out and the talk has loudly stopped. If you lose, it will be Italy, but nobody else.

The euro is here to stay. Heck, it is the world's strongest currency right now, with the possible exception of the UK pound, although it has been dipping recently. Even if Italy were to depart, it is slowly joining the US dollar as a main international reserve currency. The people predicting its demise are living in fantasy land, big time.

SheetWise writes:

Your convictions need substance. Use current conversion rates and trade options on your homes. That's an opinion.

Patri Friedman writes:

$20 is financial incentive? Wow, econ professors make less than I thought!

Making a more substantial bet would also take care of the problem of remembering it - although add to the problem of collecting it.

dWj writes:

You don't need to adjust it for inflation, though you do for credit risk, which might include the risk that you'll forget to collect the bet, supposing that's asymmetrical.

David N. Welton writes:

Yep, it's a bet for or against Italy.

If you want to remind yourself, you could get a google gmail account and plug the information into the calendar. I've started to do that with the occasional news item announcing this or that wacky prediction, since the followup never seems to get much coverage.

jb writes:

Use! It's free, and the email will remind you of the bet.

Fundamentalist writes:

Where can I find your reasons for believing the Euro will fail? Did I just miss a link?

Cyrus writes:

Unless the government changes some long-standing fiscal habits, Italy is headed for default, which in a sane world would involve leaving the eurozone. I think Italy can put that crisis off past 2010, though.

Hungary might have its fiscal meltdown before 2010, but it's not in the eurozone, and it's not obvious that it's a big enough domino to knock down any others.

Mike writes:

Could you guys find data on the extent to which the euro is being used/accepted as a reserve currency around the world, or of any articles on this? I sincerely want to know!


agent00yak writes:

Google: - Euro Reserves IMF - and the first hit is the IMF's database on foreign official reserves. It is updated as of 2006 Q3 and the dollar is 65.6% of foreign official reserves. The Euro is 25.2%. These numbers may be off as some middle eastern countries with large amounts of non official reserves may be holding more Euros (It definitely seems that way if you look at the charts).

As for the bet.. I am sure Bryan got the better deal. Considering the prevalent view, there is no reason he should have been given odds. There are many ways he could arbitrage the bet on the financial markets if he could get one for one odds in size. An overly confident person could in theory be acting as if the world sees a 0.1% probability when in fact there is a 5% probability.

By the way, if you want to know what the markets think about Italy, look at the spread between Italian and German bonds at different durations... Right now ten year notes only differ by 20 basis points. Jeremy should be betting on that spread widening instead of getting bad odds with Bryan.

(-_-) writes:

I think you will win.
I would make the opposing bet though, by 2025, the EU will be for the most part dead.

George Paci writes:

OK, seriously, I would have thought every under-40 geek would have settled on some computer-based calendar system or other by now. If I wanted to remember that bet, I'd just drop a reminder into emacs's calendar (probably for January 3, 2011, when I'd be sober enough to see about collecting) and then forget about it until it pops up in 1440 days. One of the best ways to use computers to amplify your mind is to dump stuff into them, freeing up valuable brain space.

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