How credible is putting money where your mouth is?

Noah Smith would say “not as much as you’d think.” We like to think that a willingness to bet on a particular prediction means I have a strong belief in its occurrence. If I said “I’ll bet you $100 the Atlanta Braves win tonight,” it may be tempting to interpret my offer as a statement of confidence in the outcome on its own. As Smith (correctly) clarifies, my offer can only be properly assessed by broadening your perspective of my financial position. His example:

This means when people make bets, you don’t necessarily know anything about what they really believe. Here is an example. A while ago I made a bet with Brad DeLong that U.S. inflation would go over 5% by 7/28/2015. Brad, who bet against inflation, gave me 50-to-1 odds. Now, if this were my only inflation-related bet, you could infer that I believe that there is a greater than 2% chance of 5% inflation between now and 7/28/2015. But you cannot infer that. In fact, my bet with Brad reveals nothing whatsoever about my inflation beliefs.

Why? Because I also made the exact opposite bet (i.e. that inflation would stay under 5%) with Patrick Chovanec, and gave him only 25-to-1 odds! In other words, I can’t possibly lose money, no matter what inflation does (if pizza bets could scale perfectly, I could have executed an arbitrage, but I didn’t bother; as things stand, I either break even or win 25 pizza dinner equivalents).

In other words, there are lots of reasons to bet on a prediction. And we don’t always aim for the accuracy of the forecast. Or, as Smith would put it:

[…] a bet is often used as a hedge. To use another example, I might bet on Sarah Palin winning the presidency, in order to partially hedge my personal sadness in that unfortunate state of the world.

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