Morning IM chat with my favorite broker

Favorite Broker: got your card - thanks - very nice picture and letter
me: ha
Favorite Broker: i'm serious
me: i'm about halfway done

Favorite Broker: a little too much "God" in there, but very nice nevertheless
Favorite Broker: for me
me: pascal's wager
me: can't have too much
me: can have too much of a wrong interpretation

Favorite Broker: what confuses me is how does pascal's wager relate to you?
Favorite Broker: you don't appear to be hedging your bets - you believe
me: it relates to anyone
Favorite Broker: as far as i can tell 100%

me: its more game theory than a single trade
me: you need to look at upside/downside of each node in the space
me: how do you stop out if you're wrong? that's the point, you can't

Favorite Broker: i eat odd numbers of large vegetables
Favorite Broker: been doing it since i was young
Favorite Broker: i still do it

me: yes, you are too superstitious right now to look at the wager
me: maybe someday
Favorite Broker: the wager, as it applies to those who doubt his existence leads to superstition

me: i agree with one thing [warren] buffet said yesterday: if the doctor said eating only asparagus and broccoli would extend my life by a year, i wouldn't do it
me: it's ok to doubt. but to be balanced, you need to doubt your doubts

me: i'm glad you're not drunk; it's so much harder when you are
Favorite Broker: how do you know i am not drunk
Favorite Broker: that was a bad joke
me: b/c you are trying to build your business, which means sober until the close, and then drink enough with other professionals so that everyone reveals more of their true self
Favorite Broker: lol

me: there are behavioral studies
me: drinking enhances trust
me: a teetotaler has something to hide, apparently

Favorite Broker: to you, god exists, there is no doubt. right?
me: of course there is doubt, on a certain level
me: what happens where emprics end?
Favorite Broker: clearly, but its pretty close to 100% right?
me: that's where faith begins
me: data and science are part of the visible realm, and then there needs to be some type of lens for the invisible realm. induction complements deduction

UPDATE: Scott Adams in a similar oeuvre:

A Muslim, a Christian, and a crazy guy walk into a room. The one thing you can know for sure is that at least two out of three of them organize their lives around things that aren't real. And that's the best case scenario. Atheists would say all three have some explaining to do. And atheists are the minority, which is the very definition of abnormal.

GOD.EXISTS, to be short or long?

Last November, in looking at Bryan Caplan's new book, Myth of the Rational Voter, I mentioned Pascal's Wager in the form of the GOD.EXISTS contract. Chris Masse picked up on it here, and we went a few rounds between us, Jason Ruspini, and Alex Forshaw.

Newsweek recently hosted a debate between Sam Harris, Atheist, and Rick Warren, Biblical Christian. Here is how it ends (again, with a form of Pascal's Wager):

WARREN: Can you have spirituality without a spirit?

HARRIS: You can feel yourself to be one with the universe.

WARREN: OK, then why can't you just take the next step? Because right now you're talking in extremely nonrational terms.

HARRIS: There's nothing irrational about it. You can close your eyes in meditation and lose the sense of your physical body, totally. Many people draw from that the metaphysical conclusion that "I'm just spirit, and I can transcend the body." That's not the only conclusion you have to draw from that experience, and I don't think it's the best conclusion.

WARREN: You're more spiritual than you think. You just don't want a boss. You don't want a God who tells you what to do.

HARRIS: I don't want to pretend to be certain about anything I'm not certain about.

Rick, last thoughts?
WARREN: I believe in both faith and reason. The more we learn about God, the more we understand how magnificent this universe is. There is no contradiction to it. When I look at history, I would disagree with Sam: Christianity has done far more good than bad. Altruism comes out of knowing there is more than this life, that there is a sovereign God, that I am not God. We're both betting. He's betting his life that he's right. I'm betting my life that Jesus was not a liar. When we die, if he's right, I've lost nothing. If I'm right, he's lost everything. I'm not willing to make that gamble.

I am still a buyer of GOD.EXISTS (and SPX, too). The former requires more faith, the latter, more reason. In any case, there are sellers of both, and folks who are long one while short the other. How about you?

The latest sighting of Pascal's Wager

here:

The bank should wager that the talent of its star employee exists, because it has much to gain over time if it does, while if it does not exist, the bank will lose little in expected terms. And in a competitive world, it is even worse if they incorrectly let the talent go for lack of proper compensation, because then some competitor will pick it up.

Why do people both buy lottery tickets and insurance against losses?

Hat tip to Tyler Cowen. He says:

For a long time I didn't think much of Milton's seminal 1948 article on expected utility theory, but it turns out the joke is on me...

The Friedman-Savage piece starts with an obvious puzzle: why do people both buy lottery tickets and insurance against losses? That would seem to make them both risk-loving and risk-averse at the same time. The proffered answer is simple: part of the utility function is concave, and part is convex. Across the lower range we wish to play it safe, but above a certain margina we are willing to take gambles (by the way, here is some evidence, and why it might follow from market constraints).

I admit that I have bought about 100 lottery tickets in my lifetime, whenever the (overstated) pot is over $20 million, which usually yields the (false) expected value > 1.0. The reasons why the pot and expected value are false:

1) The pot figure is a total of future payments, usually over 20 years. The lump sum payout option is about half of the advertised pot, and that is before taxes.

2) There is a material risk of splitting the pot with identical tickets.

But even knowing this, I still have spent the $100 over the last 20 years. Silly me.

Since we are on the topic of utility, awhile back, I posted a reference to Pascal's Wager. Jason Ruspini recently linked to Alex Tabarrok's paper on the rationality of taking the wager, which I had read a long time ago. If you ever find yourself estimating your personal utilities beyond your estimated life expectancy, I suggest you read the whole paper.

Ethel Barrymore's corollary to Pascal's Wager, perhaps?

The best time to make friends is before you need them.

Reminds me of this old story.

Quotes of the day

The mother of excess is not joy but joylessness.--Fredrich Nietzsche

If you see something with suspiciously consistent and positive returns, and if you have no idea how those returns are generated, then tread with extreme caution.--Felix Salmon

Let’s not fool ourselves into thinking the past was better than it was. I think it’s much better for banks to be in the banking industry rather than the household appliance industry.--Eddy Elfenbein

Public pensions are woefully underfunded — they’re promising defined benefits, but may not be able to deliver. Defined-benefit private pensions are dragging companies like GM, Ford and Chrysler toward bankruptcy. And Social Security is on an unsustainable trajectory, which the political system knows but which politicians can’t bear to confront. At least when 401(k) balances go down, the whole system isn’t rendered insolvent.--Glenn Reynolds

Greenspan then goes on to argue, as he has often in the past, about the regulatory difficulties of bursting a bubble. He has a point here, but he also undermines that point by arguing that back in 2002 he said the housing fever would eventually end. And yet, Greenspan, the most powerful Fed chairman in many decades, never budged to consistently decry the danger or even to use his various powers as a regulator and as a sage to tighten the reins. He wasn't going to rock the boat. But now he can't have it both ways. If he didn't see what was happening -- particularly in housing -- then he was blind. But if he did (and he claims he did, sort of, maybe) then he was a coward. And that's a judgment beyond ideology.--Robert Teitelman

And the McCain campaign, love 'em, you know, they're a lot of people around me, but nobody I could find that I wanted to hold hands with and pray.--Sarah Palin

Hey, I’ve got an idea — why don’t we organize society so that it rewards hard work! We could even see that people who work harder and do better make more money! And then their efforts would pay off in more general societal prosperity, making life better for everyone! And we could . . . Naaaah.--Glenn Reynolds

For a guy who talks so much about wanting a new era of responsibility, President Obama spends an awful lot of time blaming Republicans for all the wild and reckless spending he crammed into his own budget.--Charles Hurt

Indeed, as best I can tell, Obama has more than a Geithner problem. He has what I would call a Rumsfeld problem. That is to say, in the infamous words of the imperious defense secretary, the president made the mistake of going to economic war with the army he had--which was built for political speed and presidential comfort--instead of the army he needs to beat back the crisis of confidence that is crippling our markets and feeding the AIG blood lust.--Dan Gerstein

Mickey Kaus gets forwarded a lengthy discussion thread from the super-secret JournoList and, well, it turns out it's exactly the kind of thoughtful and high-brow policy salon we all imagined it to be.--Mark Hemingway

Pascal's Wager is actually a serious problem for those of us who want to use Kolmogorov complexity as an Occam prior, because the size of even the finite computations blows up much faster than their probability diminishes.--Eliezer Yudkowsky

You think your job sucks? Try working for Lenny Dykstra.--Kevin Coughlin

The best presidential Intrade color commentary

Alex Forshaw. Fo' sho!

I read about him awhile ago in the WSJ; now I see him from time to time at Midas Oracle.

UPDATE: We've even clashed comments around Pascal's Wager.

Redemptive Cynicism

Or Cynical Redemption, perhaps? Chris Masse has spurred me to engage my brain on voting, and I think the best thing I've read in a long time is what Glen Whitman said about Bryan Caplan's Irrational Voter. Caplan says:

But why are there some areas – like politics and religion – where irrationality seems especially pronounced? My answer is that irrationality, like ignorance, is sensitive to price, and false beliefs about politics and religion are cheap. If you underestimate the costs of excessive drinking, you can ruin your life. In contrast, if you underestimate the benefits of immigration, or the evidence in favor of the theory of evolution, what happens to you? In all probability, the same thing that would have happened to you if you knew the whole truth.

In a sense, then, there is a method to the average voter's madness. Even when his views are completely wrong, he gets the psychological benefit of emotionally appealing political beliefs at a bargain price. No wonder he buys in bulk.

And Whitman reflects:

Bryan focuses on economics as an area in which voters are particularly likely to be wrong, and he shows this by contrasting the opinions of voters and professional economists. I find the argument compelling – but then again, I’m an economist. Besides, as I argued in the post linked earlier, economists may be less vulnerable to psychological rent-seeking because their training imbues them with an awareness of trade-offs and a tendency to balance competing goals (since nearly any goal is subject to diminishing returns at some point). Thus, Bryan may be biasing the case in his favor by choosing an area in which the experts are less susceptible to the sort of bias we should be concerned about.

Arguably, one aspect of voters’ irrationality is their credulity about the claims of supposedly public-minded experts. As Bryan’s colleague Don Boudreaux points out, a candidate’s being “pro-teacher” is quite different from the candidate’s being “pro-education.” Similarly, “pro-union” does not necessarily mean “pro-worker.” Yet voters will often conflate the two. Although I agree with Bryan’s overall perspective, I wonder if his deference to the opinions of experts might exacerbate a prominent source of voter error.

You might call it Heisenberg's Uncertainty Principle; I call it baggage. Voter baggage. We all have post-modern 3D Xray glasses on now.

That said, I think that Caplan's antireligious bias may cost him more than anything he is able to measure, at least, according to Pascal's Wager. In sum, Pascal reasons that a Bettor should Buy GOD.EXISTS and definitely not Sell Him. The downside of expiring the contract at 0 is very small (i.e. you aren't going to Heaven, no biggie), compared to the huge upside of ending up in the money--and the huge downside if you are caught short (i.e. you spend eternity surrounded by hot brimstone).

I have 3 words for trading futures contracts, and the same 3 words for the eternal soul:

Risk Adjusted Returns

By another Way: For what does it profit a man to gain the whole world, and forfeit his soul?