Tuesday, May 7, 2013

Is Brad DeLong Slicker Than Bob Murphy and Noah Smith?

Murphy is making a big whoopdee doo over a bet between Noah Smith and Brad Delong. Murphy calls it "Grabbing DeLong’s Bank Account With Both Hands," since Murphy thinks Smith will gorge himself if he wins and take big bucks away from DeLong, but if the bet is to be argued over fine details, Murphy appears to have it all wrong and DeLong will be the big winner, regardless of who officially wins the bet.

Here's the bet as described by DeLong (my bold):
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.

Miles Kimball will be the judge in charge of refereeing the bet. The decisions of the judge will be final and unappealable.

Furthermore, Noah's brave and gracious willingness to take the Cochrane-Argentina side of this bet at odds of only 50-1 will not be construed as a statement of his confidence in or of his support for any economist or position of economic analysis that judges expansionary fiscal policy at the zero lower nominal interest rate bound to be "insane" or that judges "1932" to currently be a less dire risk for the U.S. than "Argentina".
Here's Murphy's interpretation:
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.
 I'm not sure Murphy understands the bet outlined by DeLong, if Murphy wants to get cute and interpret the bet on the fine details. Let's focus on the sentence I put in bold:
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.
What is DeLong talking about here, "divided by the number of people present"? That looks to me like a slick DeLong loophole that has suckered both Murphy and Smith. If the conditions are met so that Smith wins the bet, what is to prevent DeLong from "suggesting" to everyone in the classes he teaches to be "present" at Zachary's for the dinner, but that they should not order anything? Thus, the divisor becomes huge and DeLong could end up paying less than what Smith will have to pay if DeLong wins the bet and only has to pay on a one on one basis. Of course, now that I have blown the cover on this DeLong loophole in the bet, Smith could bring along pizza eaters and beer drinkers to counter the non-eating, non-drinking DeLong students who are "present" at the dinner. It could be a crazy night at Zacahry's.

That said, DeLong has built another loophole (even slicker) in the bet. It's one any economist would appreciate. I won't blow the cover on this one. Let's see if Murphy can figure it out between now and July 28, 2015.

UPDATE

Noah Smith has confirmed my view of the slick move by DeLong that Murphy missed. Murphy now posts an email response from Smith:
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.”

3 comments:

  1. The odds favor DeLong in my view. If the CPI rises above 3.0% or so, I think they'll simply change the manner in which they calculate it to bring it back down, much like they are doing now with the GDP.

    As far as the bet details go, They should have just kept it real simple. Like, "if this happens then Smith owes DeLong $100.00," and vice versa. DeLong has muddied the wording up like a good lawyer would. "Total cost of the dinner TO ALL"??? What does he mean "to all"? The cost is supposed to be to DeLong. He is buying the dinner, but this is apparently DeLong's way of making this particular wager a living, breathing document.

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  2. "alternate means of payment" - a coupon for free meal at Zachary's ?

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  3. It seems like the true winner of this bet is Zachary's.

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