Saturday, December 20, 2008

When is punting on the economy "utterly irresponsible"?

When it is done through Centrebet, according to Australia's Treasurer.

The bookmaker is taking bets on whether Australia will enter a recession during 2009.

You can bet here, and see the latest prices, which suggest Centrebet expects a recession. If you disagree, by all means punt. At the price they are offering you stand to make a fortune off them.

Justin Wolfers, an expert in prediction markets, reckons Swan is being a bit harsh on Centrebet.

"In recent months, there have been millions of dollars bet in options markets, as traders seek a big payday in the event that the economy heads south — and this hasn’t raised an eyebrow...

The contrast between the Treasurer’s response to financial trades and bookies’ bets provides a nice example of how people respond differently, depending on how a bet is framed. One is modern finance, while the other is a
repugnant market. Both, of course, are simply state-contingent contracts."

One of Wolfers' commenters asks:

"What's the difference between a bet and a call option? Whether the guy making it wears a tie and whether the bookie sits in a corner office?"

It reminds me of Tim Harford's BBC radio documentary on repugnant markets, which begins with him making a phone call to the Ladbrokes betting agency:

"EMPLOYEE: How can I help you?

HARFORD: Yeah, I wanted to place a bet that I, Tim Harford, was going to die in the next year. Could you give me odds on that?


HARFORD: Can I take a bet on my own death?

EMPLOYEE: Erm, I’m not too sure. Just hold the line a moment please. Thank you. (Music)

HARFORD: Should we let our feelings of repugnance get in the way of the market?

EMPLOYEE: Hello, Mr Harford?


EMPLOYEE: Hello, sorry to keep you waiting there. Okay. No, basically we don’t bet on deaths because it’s a negative bet, you see.

HARFORD: There’s a lesson in that. If you want to take a bet with a stranger that you’re going to die, don’t call a bookmaker – call a life insurance company."