[Link] Bets, Portfolios, and Belief Revelation
In a post today at EconLog, Bryan defends the “a bet is a tax on bullshit” maxim contra “portfolios reveal beliefs, bets reveal personality traits and public posturing” (preferred by Noah Smith and Tyler Cowen).
1. If portfolios really “reveal beliefs,” Tyler and Noah should be able to look at a random person’s portfolio and tell us everything he believes. Yet neither Tyler, Noah, nor anyone else can do this. They can’t even deduce someone’s financial beliefs from his portfolio, much less his beliefs about economic policy or the Fermi paradox. Portfolios say something about beliefs, but every portfolio is consistent with a very wide range of views.
2. Most people’s portfolios exhibit extreme inertia. Even prominent Nobel prize-winning economists admit they follow simple rules of thumb when they invest. So unless people’s beliefs are carved in stone, how could portfolios possibly reveal much about their beliefs? Tyler is a case in point: He changes his mind a hundred times a day, but he follows a simple financial strategy that hasn’t varied in years.
The full post can be found here.
I notice that few portfolios will very sharply reflect anyone’s belief about one particular thing. Did you buy gold as a hedge against inflation, against the zombie apocalypse, because you thought a lot of idiots were going to be bidding up its price in the future, or because you like the pretty shiniez? You can infer something about inflation beliefs from a portfolio, but there are any number of other considerations as well; the problem is underdetermined. Additionally, of course, not every belief can be liquidly bet on at all; in 2010 it was hard to go either short or long on the Higgs discovery outside of finding an individual to bet with. At an absolute minimum, bets can surely reveal beliefs about illiquid and shallow markets.
Intrade had a Higgs market. It wasn’t hugely liquid, but it was probably better than finding individuals.
Fair enough, I chose my example badly; but with Intrade now shut down, we seem to be back to the dark ages of 2006 (ish? Not sure when Intrade started.)
Yeah, Intrade is not currently functioning… However on the bright side: Intrade’s problems seem to be internal & financial, not criminal/legal, so it’s possible it will resume trading; and with the rise of Bitcoin, new betting sites have been enabled and quasi-prediction-markets like http://betsofbitco.in/ are already functioning—they suck compared to Intrade, but people are aware of the market niche and we can hope for a new Bitcoin-based prediction market at some point in the near future.