Betting on climate change

The Foresight Exchange market is an internet-based game which runs an ideas futures market, covering a wide range of claims including a number of environmental issues. The basic betting mechanism is based on the concept of a pair of coupons labelled “Yes, claim X is true” and “No, claim X is false” (where X is a proposition whose truth is not yet known). These coupons can be bought and sold individually on the open market, and a pair of them can always be bought or redeemed for $1 from the bank. When the claim’s truth is determined, the correct coupon is redeemed for $1 and the false coupon becomes worthless. The market price of the Y coupon is the market’s estimate of the probability of the claim being ultimately proved true. Here are a couple of examples – indicating how confidently (or otherwise) the market predicted the re-elections of Clinton and Bush in 1996 and 2004 respectively.

The Foresight Exchange is a small market with a limited number of players, and is certainly not perfect – I presented a simple analysis in a poster at the EGU in April, and I have also discussed a couple of claims in more detail here and here. (These are a slightly different type of claim, where the payout of the Y coupon depends continuously on the value of a variable at a specified future time – such as the global mean temperature in 2030. The N coupon pays $1-Y as before.) As Hanson’s theory predicts, by participating in the game, I have both improved the price on these claims (increasing market skill) and simultaneously increased my wealth (received a reward for my contribution). Although this small and non-serious market has noticeable inefficiency, a real money market could certainly hope to do better. So what are the drawbacks? It seems that there are are surprisingly few. Fears that rich vested interests could rig the market are generally misplaced: it would cost them a lot of money to do so, potentially much more than the price of influencing a few high-ranking experts. Robin Hanson’s pages have a great deal of discussion about the various criticisms of the idea that have been offered, and also how the basic idea could be extended to cover a wide range of applications.

I’ve recently been trying to establish consensus on the subject of global temperature rise, by arranging bets with sceptics who claim that the IPCC TAR is overly alarmist. Richard Lindzen was the first I noted who forecast here that over the next 20 years, the climate is as likely to cool as warm, and said he would be prepared to bet on it. However, when challenged to a bet, it turns out that he expects odds of 50:1 in his favour, ie he will only bet on the chances of cooling being at the 2% level or higher, far short of his 50% claim. My quick and dirty estimate above based on the IPCC TAR suggests that they would put the probability at more like 10%, so his offer actually appears to affirm the IPCC position. He also suggested an alternative bet (see here for my comments on this article) based on the amount of warming: >0.4C warmer and I win $5,000, <0.2c and he wins $10,000. Again, no-one who believes the IPCC summary would find his offer attractive, since it has negative expected value. The chances of winning and losing are roughly equal, so there does not appear to be any possible justification for his expectation of a 2:1 ratio (in his favour) in the stakes. In both cases, in contrast to his words, his position seems to be more alarmist than the IPCC!

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