George Rebane – 28aug24

Suppose parties A, favoring Trump, and B, favoring Harris want to bet on the election. And to add spice to the affair, suppose A has made known his assessed probability *P _{A} *that Trump will win, but all that B has done so far is to assure everyone that Harris has the election in the bag. However, B has yet to reveal his assessed probability

*P*that Harris will win. How can such a bet be negotiated so that B’s real belief in Harris’ victory becomes known. Perhaps, we can let money do the talking, and see where that takes us.

_{B}Let’s say after some dickering, A and B agree in principle that the cash bet should result in the expected winnings of both parties be equal – what could be more fair than that? As usual, both parties calculate their expected winnings by multiplying their cash payoffs by their belief (probability) of their candidate’s victory. But no matter whether both use their probabilities or not, the dollar amounts of the bet are agreed on – A bets *C _{A} *that B will win with Kamala’s victory, and B bets

*C*that A will win with Trump’s victory. The relative sizes of the amounts reflect the odds of the bet. So in principle the bet reflects the equality of expected payoffs for each party.

_{B} For party A: *P _{A}C_{B} = *(1 –

*P*)

_{A}*C*

_{A} For party B: *P _{B}C_{A} = *(1 –

*P*)

_{B}*C*

_{B}From these two relations we can immediately estimate each party’s belief probability.

To obtain the resulting odds of the bet we solve for the ratio, say, *C _{A}/C_{B}* from each party’s perspective.

Suppose now that A has already declared his belief at *P _{A}* = 0.2, indicating that Trump will probably not win. Substituting this in the above equation calculates the minimum odds A will accept at

*C*= 0.2/(1-0.2) = 1/4. So A should be willing to accept any bet where

_{A}/C_{B}*C*≤ 4

_{A}*C*.

_{B}Since it is clear from B’s ample display of TDS in which he claims that Trump will surely lose, we can safely assume that *P _{B} > P_{A}* = 0.2. So let’s say that the bet amounts were negotiated to be

*C*= $100 and

_{A}*C*= $500. This most certainly satisfies A’s required odds, and yields the pro forma estimate of

_{B}*P*≥ 500/(500+100) = 0.833. From this we can conclude that B’s odds calculate to

_{B}*C*= (1-0.833)/0.833 = 1/5, and that he will most likely not accept

_{A}/C_{B}*C*> 5

_{B}*C*. The negotiated amounts satisfy all these conditions, so it appears that we have a satisfactory bet and in the process have ferreted out that B’s belief in Kamala’s victory is at most 5/6 since he will not give A better odds than 5:1. Now go forth and wager prudently.

_{A}
The prudent wager is no wager at all.

Posted by: Gregory | 29 August 2024 at 04:58 PM

Gregory 458pm - Au contraire Gregory. I assess and make prudent wagers daily in the security markets (have done so successfully for years), and so do many other investors. But if your point is that of the all the wagers being made, very few are prudent, then I agree with you.

Posted by: George Rebane | 29 August 2024 at 06:06 PM

I believe Gregory was referring to the idea of wagering on the outcome of the Nov pres election.

Please correct me if I'm wrong.

The security markets are far more rational as something to risk your money on. More like playing poker than the slots.

There are so many moving parts involved in this coming election and we have already seen the near miss of what some are capable of in their desperation.

I would expect in the coming weeks to see stunts that would be unimaginable just a few years ago by a certain political party. They have openly stated they will do anything and everything to stop Trump and I have yet to hear of any limits to what these actions might be.

Posted by: Scott O | 29 August 2024 at 08:09 PM

The best bets are made when you can make your head and heart fly in tight formation.

Posted by: George Rebane | 29 August 2024 at 08:44 PM

My head and my heart (gut) say hang on tight.

We're in for a rough flight.

Posted by: Scott O | 29 August 2024 at 10:53 PM