Bryan Caplan  

Hail Bob Murphy

My Inflation Bet with Bob Murp... Hummel on Moss on Limited Liab...
My inflation bet with Bob Murphy, unlike David's, doesn't mature until January 1, 2016.  David as usual is a model of gentlemanly conduct, but other observers are cackling with glee at Bob's defeat. 

This is frankly deplorable.  Bob deserves far more respect than everyone who claimed to know the future rate of inflation but failed to put their money or reputation on the line.  Per my Bettor's Oath:
When I win a bet, I will not shame my opponent, for a betting loser has far more honor than the mass of men who live by loose and idle talk.
Bob deserves extra praise for not claiming that he was "really right" or that "bets don't mean anything."  Instead, he concludes: "[C]learly the lesson here is: Don't make bets with a guy who was studying the Fed before I was born."  Admirable, though the real lesson to draw is simply "Don't bet against the TIPS market."

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COMMENTS (8 to date)
Joe Teicher writes:

I agree with you that people who are willing to act on their stated beliefs should be praised, compared to people who just talk, but I think these bets are more like talk than action. For one thing, the $ amounts are just too small. I don't think Bob Murphy should be able to get out of criticism for his silly inflation predictions for a measly $500.

I also don't understand why these bets seem to occur so far from market prices. An even money bet of 10% inflation was ridiculous. As you point out, the TIPS markets didn't predict anything like that. Murphy could have gotten much better terms on an inflation bet in the market.

Why should we praise someone who makes a small bet with very bad terms when he could have made a much larger bet with much better terms? Until these bets start to get serious I think they should be regarded as a cheap way to fake taking action rather than the real deal.

Tom West writes:

I have to disagree with Joe in that the amount is too small. Only a fool makes P=1 market predictions or makes big bets when P

Don't bet against the TIPS market.

Betting against any large market force (like TIPS) is stupid until very suddenly, it isn't.

The human market harshly penalizes people who move against trend and lose (as opposed to people who go with the trend and lose - those are easily forgiven because "nobody saw it coming"), so there's a tremendous force to *not* predict unexpected or low-probability outcomes or try to take advantage of them.

We celebrate the few that took the risk and swum against the crowd, but the reality is that most who tried that paid dearly for their temerity. (I saw a 100% casualty rate among the analysts I paid attention to who predicted the dot-com collapse - then the collapse came. As far as I know, none of them got their jobs back.)

So, no, I think the market in general does a *terrible* job in making low-mid probability predictions. It does move *very* fast once the tipping point is reached.

Ken B writes:

I hope Bob understands the incentives Bryan has to keep him making such bets!

Tracy W writes:

When is $500 a measly amount of money? Is Joe from Hong Kong?

(Note: In my experience a lot of rich people are very careful about their money, even amounts much smaller than $500. For much the same reasons as Olympic athletes are very careful about their workouts).

David R. Henderson writes:

@Joe Teicher,
You sound like a serious betting man. Maybe there's some economic issue on which you'll give me 10-1 odds and I bet $500. Any suggestions?

Urstoff writes:

To me, it's not the money of the bet that's important. It's that a bet is a public announcement that not only is one making a prediction, but that eventually the prediction will be compared with reality and the bettors will have to acknowledge whether their predictions were correct or incorrect. It's the latter that differentiates these bets from most predictions, whose accuracy has no consequences and is never acknowledged.

Joe Teicher writes:

@David R. Henderson
Thanks for the offer! It would be really fun for me to have a public bet with a prominent economist, and I would be willing to lose a measly $5K for the opportunity!

I think the hard part would be coming up with a bet we could agree on. I guess I would be willing to take the CPI bet for the remainder of the term of Bryan Caplan's bet. So, I get $500 if the headline CPI never crosses 10% before jan. 1 2016 and you get $5K if it does.

aaron writes:

Bob also put up $500 to your $450.

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