A Bet is a Tax on Bullshit

by on November 2, 2012 at 7:35 am in Current Affairs, Data Source, Economics, Political Science | Permalink

Nate Silver, whose models give Obama a high probability of winning reelection, has offered one of his critics a bet. “Putting your money where your mouth is,” is a time-honored principle of integrity in my view but the NYTimes Public Editor is very upset. Margaret Sullivan, however, never offers an argument against betting instead treating it as unseemly.

[Betting is] inappropriate for a Times journalist, which is how Mr. Silver is seen by the public even though he’s not a regular staff member.

“I wouldn’t want to see it become newsroom practice,” said the associate managing editor for standards, Philip B. Corbett. He described Mr. Silver’s status as a blogger — something like a columnist — as a mitigating factor…

…When he came to work at The Times, Mr. Silver gained a lot more visibility and the credibility associated with a prominent institution. But he lost something, too: the right to act like a free agent with responsibilities to nobody’s standards but his own.

The closest to an argument against betting is this:

…whatever the motivation behind it, the wager offer is a bad idea – giving ammunition to the critics who want to paint Mr. Silver as a partisan who is trying to sway the outcome.

My best parse of the argument is that by betting Silver has given himself an interest in the election and this hurts his credibility. Nothing, however, could be further from the truth.

A properly structured bet is the most credible guarantor of rigorous disinterest. In order to prove his point, Silver is not required to take the Obama side of the bet! At the odds implied by his model (currently between 3 and 4 to 1) Silver should be willing to take either side of a modest bet. Indeed, we could hold a coin toss, heads Silver takes the Obama side, tails he takes Romney.

In fact, the NYTimes should require that Silver, and other pundits, bet their beliefs. Furthermore, to remove any possibility of manipulation, the NYTimes should escrow a portion of Silver’s salary in a blind trust bet. In other words, the NYTimes should bet a portion of Silver’s salary, at the odds implied by Silver’s model, randomly choosing which side of the bet to take, only revealing to Silver the bet and its outcome after the election is over. A blind trust bet creates incentives for Silver to be disinterested in the outcome but very interested in the accuracy of the forecast.

Overall, I am for betting because I am against bullshit. Bullshit is polluting our discourse and drowning the facts. A bet costs the bullshitter more than the non-bullshitter so the willingness to bet signals honest belief. A bet is a tax on bullshit; and it is a just tax, tribute paid by the bullshitters to those with genuine knowledge.

derek November 2, 2012 at 2:20 pm

Is Alex unaware that basically all people are risk-averse? The NYT would have to offer Silver a higher expected value for tying his forecast’s performance to the outcome in order for this idea not to effectively be a salary cut.

Paul November 3, 2012 at 9:06 am

Risk aversion is why Tabarrok says “modest bet.”

Risk-o-phile November 2, 2012 at 3:21 pm

Betting when the given odds are the odds that one believes to be true is strictly evidence that one derives utility from the act of gambling itself. Silver shouldn’t necessarily take 3:1. He should take anything (<3):1 .

Jeremy Hoffman November 2, 2012 at 3:24 pm

Alex Tabarrok has a mistake in his argument. He suggests we flip a coin to decide which side the pundit (Nate Silver, in this case) has to bet on (at the odds that he’s forecasting). That wouldn’t incentivize Nate Silver to make an accurate forecast at all.

It’s like the trick where the two of us have to split a piece of cake, and the solution is that I cut the piece in half, and then you get to pick which half is yours. If instead, after I cut the cake in half, we flip a coin to decide which piece I get, then I’m indifferent between all possible cake slices — my expected value is half the cake, no matter how I cut it. (Please grant me the ludicrous assumption of linear utility of cake for this analogy.)

To make this scheme work, you have to give Nate Silver an adversary that gets to pick “over” or “under.”

James November 2, 2012 at 7:00 pm

+1

Bernard Guerrero November 3, 2012 at 11:18 am

Actually, that’s exactly what Alex Tabarrok is proposing, that is, an odds-weighted bet and the ability for the bettor to take either side of the EV=0 bet.

rpenm November 3, 2012 at 5:08 pm

Even if Nate’s odds differ from his actual beliefs, randomly assigning his side of the bet still results in an EV=0. Thus, no incentive to be accurate is created. To work, the blind trust would need to take bets on the over/unders of the published odds, as Anonymous lays out below.

Bernard Guerrero November 3, 2012 at 8:56 pm

I’ll agree that random assignment is a problem, but I think Anonymous’ proposal gives Silver a way to game the system. OTOH, letting a bettor *select* either side properly incentivizes Silver to set odds to the best of his ability.

Bob November 2, 2012 at 5:17 pm

Perhaps I’m misunderstanding the proposal here, but if someone told me they were placing a $100 from my salary to place on either side of a bet, I’d assume I was risking $100 on an unknown side. With such a bet, I would maximize my return by making the actual favorite a heavy underdog rather than by being accurate.

Gordon Mohr November 2, 2012 at 5:43 pm

The idea of a ‘blind trust bet’ is wonderful.

But I think more accurately, you’d want the journalistic prognosticators to have their compensation inside a ‘blind trust *book*’ that takes other bets whenever they are consistent with the public predictions, *plus* a vig.

Otherwise, this trust is only a negative motivator — its expected return, taking bets on either side, offering exactly the right odds, is zero… and at a cost of variability. Add the vig and let the trust seek out offsetting bets in other markets, and then participation is both a signal of the writer’s confidence, and a positive-expected-return activity.

Managing such blind trust pools for professional prognosticators could become a third-party service.

Perhaps Silver putting his silver where his mouth is, and Tabarrok adding the ‘blind trust’ angle, signals the dawn of ‘Delphic Journalism’.

W4LT3R November 2, 2012 at 5:44 pm

Silver’s model currently (his “now cast” at 2:35 Pacific time) makes two intertwined predictions:

1. Obama currently has an 82.9% probability of reelection with
2. 303+ Electoral votes

he would find a lot of action if he offered 4:1 odds that Obama tops 300 EVs. Such a bet strips the partisanship out of the betting and places it on confidence in the accuracy of Silver’s model.

here’s another: one of Silver’s claims to fame is that he called 49 of 50 states in 2008 (although, just about everyone called the first 47, so he really got 2 of 3).

Let’s say the over/under on correctly called states this time is 48.5 . . . anyone taking the over? how about at 47.5?

Let’s just look at the supposed 8 battleground states of Nevada, Colorado, Florida, North Carolina, Virginia, Iowa, Ohio and New Hampshire. Over/under on correctly called is 6.5. He currently has all but Florida and North Carolina going to the President. Anyone taking the over?

James November 2, 2012 at 6:59 pm

It’s strange to propose the blind trust to incentivise him to care about the outcome. His expected profit/loss doesn’t change as he varies his prediction probability. This is trivial to show mathematically, but the intution is that even if he picks a ridiculous probability (say, Obama 1% to win), then one side of the bet is very good and the other very bad, but since he’ll randomly get one of those two sides, he’s indifferent.

It DOES affect the variance of his profit/loss. The more accurately his prediction resembles the true outcome, the less volatility there will be in this bank account over time.

Gordon Mohr November 2, 2012 at 8:13 pm

Don’t assume he’ll find takers on both sides, just that the blind trust will try around the predicted odds. So a ridiculous probability choice will be a sure loser: it’ll only find counterparties who “take him to the cleaners”.

James November 3, 2012 at 3:51 am

I agree that would be make more sense, but I was responding to Alex’s model: “randomly choosing which side of the bet to take”

David Wright November 2, 2012 at 7:53 pm

I think that most of the people who are up in arms about Silver’s prediction are honestly confused about the math. We have a long journalistic tradition of reporting poll results, which are two percentages that sum to 100%. We have almost no journalists tradition of publishing win/loose probabilities, which are also two percentages that sum to 100%, but answer a different question that the one answered by the poll results. Silver is reporting ~70%/30% as the answer to the second question, when almost no one has ever written about that question before. There are lots of reports reporting ~55%/45% as the answer to the first question, which is the question that people are used to having answered. People who are not statistically savy are going to assume that Silver is answering the same question as everybody else and his answer is going to look suspect to them because it is so far off the other numbers they are hearing.

rpenm November 2, 2012 at 10:18 pm

I suspect Sullivan’s objection to the bet originates more in conservative anti-gambling norms than conflict of interest concerns. She would have been just as upset if Silver bet on the accuracy of his model’s electoral college outcomes or Senate race outcomes.

There were probably once good reasons for those norms – wealth used to be quite communal, and groups required norms to enforce communal risk aversion.

Steve November 2, 2012 at 10:37 pm
DK November 3, 2012 at 2:46 am

You guys, Tyler in particular, should start making your various claims in a form of firm predictions and offer bets on them. Call it bullshit reduction program.

mark November 3, 2012 at 3:39 am

“Furthermore, to remove any possibility of manipulation, the NYTimes should escrow a portion of Silver’s salary in a blind trust bet. In other words, the NYTimes should bet a portion of Silver’s salary, at the odds implied by Silver’s model, randomly choosing which side of the bet to take, only revealing to Silver the bet and its outcome after the election is over. A blind trust bet creates incentives for Silver to be disinterested in the outcome but very interested in the accuracy of the forecast.”

You don’t understand betting. If my “model” predicts a 66.6% chance of heads on a coin toss. that means odds of 1/2 on heads and 2/1 on tails (UK odds). If you then RANDOMLY assign me heads or tails i’ll still be tending towards a long run win/loss of ZERO.

Do the math.

Barry S November 3, 2012 at 9:57 am

At every stop, Clinton reminds voters of his own days in office. “I am the only living former president that ever gave you a budget surplus,” he said in Palm Bay. And only the brainless sheep bleat “Yes!” There was this little thing called the INTERNET that Gore invented. It’s global and explosive growth was a once-in-history event that entrepreneurs, not you and congress, made happen.

I see you also tweaked Obama’s slogan to suit you: FOREPLAY!

Anonymous November 3, 2012 at 2:56 pm

This betting system makes absolutely no sense. The expected value for Silver is 0 *regardless* of what he sets the odds at.
Since the article proposes that “we could hold a coin toss, heads Silver takes the Obama side, tails he takes Romney.”, his expected value will always be 0. For example, let’s say Silver sets the odds at 10:1 in favor of Romney (and for the sake of example, let’s assume the real probability is 80/20 Obama, though this number could be anything and the argument would still hold true):
If heads, and he is randomly assigned Obama, then for each dollar bet, his expected return is (10*.8) – (1*.2) = 7.8
If tails, and he is randomly assigned Romney, the for each dollar bet, his expected return (1*.2) – (10*.8) = -7.8
But since he’s equally likely to be assigned either of those scenarios, his overall return, even setting the odds at this outrageous line, is 0.

A better proposal, it seems to me, would be to set aside a portion of his salary, and bet on any lines that differ from it according to the model. For example, if Silver says 80/20 Obama (implying 4:1 odds), and there’s a bet offered at 2:1, the NY Times should bet on Silver’s behalf for Obama at 2:1 odds. Then, Silver would actually have an incentive to make accurate predictions.

James November 3, 2012 at 5:15 pm

The new proposal does incentivise him correctly, but reintroduces the conflict of interest that the blind trust was set up to avoid.

James Harvey November 3, 2012 at 10:00 pm

“Silver should be willing to take either side of a modest bet.”

If he were risk neutral and there were no transaction costs, this would be true, but neither of those are true of the real world. Smart bettors only place wagers when they believe the odds are substantially in their favor.

The bigger problem here is that people have a poor understanding of how probability works, so they think that since Silver says Obama has an 80% chance of winning, if Romney wins, then Silver’s prediction is a failure. But Silver’s been quite clear that even an 80% chance of winning isn’t a sure-thing prediction. The 20% chance of winning definitely makes Romney the underdog, but it’s still more likely than the World Series being a sweep.

Adam Hooper November 4, 2012 at 2:44 pm

To me, Sullivan’s criticism is simple: the New York Times should not insult its readers. (It should *entice* the public, not taunt it.)

Will Silver’s public bet earn the New York Times more readers, in the long run? That’s hard to determine. But even harder to determine are the potential nasty effects (i.e., long-term reader disenchantment).

Ed November 5, 2012 at 12:56 am

So Silver would only bet 1:1? Seems like he’s admitting his “Model” is bullshit. Not that we didn’t already know that.

Gilligan November 5, 2012 at 3:10 am

Isn’t the bet itself BS? An admission that the Time’s and Silver’s reputation were in themselves not enough to ensure the veracity of the prognostication? By making this BS bet silver seems to be putting his money behind his calculations. The editor then comes to the rescue and claims that Silver is now linked to an organization that is above this sort of thing. Silver now has the benefit of seeming to go all in with out putting up anything.

The truth is that there is huge wager.already placed on the outcome of this election. Can the media br trusted at all in regards to their desired outcome? If Romney wins this election there will be a flurry of excuses and claims of voter suppression/fraud to explain the lie of the present.

Andreas Moser November 6, 2012 at 10:58 am

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