06 May 2013

Grabbing DeLong’s Bank Account With Both Hands

DeLong 13 Comments

[UPDATE 1 and 2 below.]

Bryan Caplan discusses a wager between Noah Smith and Brad DeLong:

If, at any time between 7/28/2012 and 7/28/2015, core consumer prices, as recorded in the FRED database series CPILFESL, are up more than 5% in the preceding 12 months, and if over the same 1-year period monthly U3 unemployment (as recorded in FRED database series UNRATE) has not averaged below 6%, then Brad DeLong agrees to buy Noah Smith one dinner at Zachary’s Pizza at 1853 Solano Ave. in Berkeley CA, and to pay Noah 49 times the cost–including tax but excluding tip–of Noah’s meal at Zachary’s in Federal Reserve notes, or in alternative means of payment accepted by Zachary’s should Zachary’s Pizza no longer be accepting Federal Reserve notes at the date of the dinner. This cost will be assessed as the total cost of the dinner to all, divided by the number of people present, regardless of how much pizza is consumed by or how much alcohol is drunk by specific individuals.

If however, the above condition is not satisfied, Noah agrees to buy Brad one dinner at Zachary’s….[Bold added.]

OK if you follow the link, it’s clear that DeLong thinks he and Noah just made a bet at 50-1 odds. But the way I’m reading those terms, this isn’t the case at all. They aren’t agreeing to a specific dollar amount, or even a specific meal.

Consider: If Noah happens to win, he will walk into that restaurant knowing that for every $6 (say) beer he orders, DeLong will cover the cost and on top of that, will owe Noah an additional $147 in cash. In contrast, if DeLong wins, then he merely gets to drink for free, with Noah picking up the bar tab.

I’m guessing Noah will end up drinking a lot more if he wins, than DeLong would. At least, if I believed that incentives affected consumer behavior.

UPDATE: I sent this post to Noah, in recognition of his craftiness. He replied (and gave me permission to post it here): “??? Assuming we can eat and drink the same amount, and that we will both eat and drink as much as we can, the true odds should be the same as the stated odds…”

I’m assuming there must be more to the liquidity trap than I realized, since my point still seems pretty obvious.

2nd UPDATE: Noah writes back, “By the way, if you read the terms of the bet closely, it’s me who’s susceptible to bet-gaming, not Brad. The amount he pays me in cash is 49x the average cost of the meals of the people who are at the dinner. If he wants to reduce my winnings, all he has to do is invite a bunch of friends who don’t eat or drink a thing.”

13 Responses to “Grabbing DeLong’s Bank Account With Both Hands”

  1. Noah Smith says:

    “Liquidity trap” = haha

  2. Noah Smith says:

    BTW, here are the actual terms of the bet:

    “If, at any time between 7/28/2012 and 7/28/2015, core consumer prices, as recorded in the FRED database series CPILFESL, are up more than 5% in the preceding 12 months, and if over the same 1-year period monthly U3 unemployment (as recorded in FRED database series UNRATE) has not averaged below 6%, then Brad DeLong agrees to buy Noah Smith one dinner at Zachary’s at 1853 Solano Ave. in Berkeley CA, and to in addition pay Noah 49 times the cost–including tax but excluding tip–of Noah’s meal at Zachary’s in Federal Reserve notes, or in alternative means of payment should Zachary’s pizza no longer be accepting Federal Reserve notes at the date of the dinner. This cost will be assessed as the total cost of the dinner to all, divided by the number of people present, regardless of how much pizza is consumed by or how much alcohol is drunk by specific individuals.”

    If Brad wanted to game the bet he could just invite a lot of friends who ate nothing, thus reducing the average cost of the dinner. Naturally I could do the same thing if I lose.

    But neither of us will, I expect…

    • Robert Fellner says:

      There’s a much stronger incentive for you to drink\eat more than DeLong as you will get 49x the check, while DeLong just gets the check paid.

      DeLong is much less likely to drink himself sick, just to get the satisfaction out of making you pay an extra 20 dollars for his extra drinks. It makes much more sense for you to drink in excess of what you normally would for enjoyment, as you are getting a cash reward of 49x time the total bill.

      This is a very poorly designed bet and certainly does not offer true odds of 50-1. They are much, much greater than that.

      • Noah Smith says:

        But Brad only has to pay 49x the average cost of dinner, not my personal cost.

        All he has to do to reduce his loss is to bring along 6 friends who all eat nothing…thus dividing the average dinner cost by 4. I’d have to drink an awful, awful lot to offset that!

        • Robert Fellner says:

          So you can counter and bring 10 friends then, right? And then he brings 20 friends who eat nothing and watch your 20 friends gorge themselves silly, and so on and so on.

          it sounds like you want to make a bet like “A pizza/beer party for no more than X amount” but did so in a really strange way that creates more problems than it solves.

      • Robert Fellner says:

        The divided by # of people present thing just makes absolutely no sense. It’s like what is the point of stipulating these conditions that totally destroy the integrity of the bet, while stating “I don’t expect we will use them.”?

        I suspect Murphy is ignoring that in his analysis, as did I, because if you factor that in you don’t have an actual bet worth analyzing.

  3. Robert Fellner says:

    The Update to this post is beyond baffling.

  4. Major_Freedom says:

    The bet should have included a stipulation of the number of people allowed present, and who has control over who attends.

    Any chance both of you will agree to change this particular detail, now that you’re already midway through the relevant time period of the bet?

    • guest says:

      DeLong will only be able to invite so many people before regulations make accommodations for them prohibitive for Zachary’s Pizza, but the amount of food and beer that can be ordered is (presumably) greater than what “full capacity” can consume.

      Remember: It’s 49x the tab, not what is consumed.

      DeLong has only one way out: Get Noah drunk and take pictures to trade for his money back.
      😀

  5. John Aziz says:

    I think it’s an interestingly-constructed bet, albeit not necessarily at 50/1.

    To be honest, I like Noah’s chances at the odds he is paying. As Nassim Taleb has noted, we very often underestimate these kinds of tail risks.

    Still, DeLong is the overwhelming favourite. Forces in the economy are overwhelmingly deflationary.

  6. Blackadder says:

    I foresee an arms race here: Noah drinking pitcher after pitcher while DeLong frantically pulls people off the street to join the party.

  7. Jim Hodge says:

    I agree and would argue that Freedom is often times less than free. It hard work. Jimhodgeallied.com

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