Is my general line of reasoning correct here, and is the style of reasoning a good style in the general case? I am aware that Eliezer raises points against “small probability multiplied by high impact” reasoning, but the fact is that a rational agent has to have a belief about the probability of any event, and inaction is itself a form of action that could be costly due to missing out on everything; privileging inaction is a good heuristic but only a moderately strong one.
Even if you’re a well-calibrated agent—so that if you randomly pick 20 events with a 5% subjective probability, one of them will happen—the set “all events where someone else is willing to trade on odds more favorable than 5%” is not a random selection of events.
Whether the Bitcoin markets are efficient enough to worry about this is an open question, but it should at least be a signal for you to make your case more robust than pulling a 5% number out of thin air, before you invest. I think the Reddit commenters were reasonable (a sentence I did not expect to type) for pointing this out, albeit uncharitably.
Is “take the inverse of the size of the best-fitting reference class” a decent way of getting a first-order approximation? If not, why not? If yes, what are some heuristics for optimizing it?
In my experience, this simply shifts the debate to which reference class is the best-fitting one, aka reference-class tennis. For instance, a bitcoin detractor could argue that the reference class should also include Beanie Babies, Dutch tulips, and other similar stores of value.
Thanks, I think this might actually be the argument I was looking for.
Whether the Bitcoin markets are efficient enough to worry about this is an open question
Right, so now the question is one of, does this idea of adverse selection actually apply?
I suppose one reformulation of the point made in the article is: if I believe X will happen with probability 5%, then I do not necessarily want to bet on X at 4.99% and bet against X at 5.01%, because it could be that my confidence is low enough that the very fact that someone wants to bet for or against me will shift my estimation of X in either direction outside that range.
So a safety factor is necessary. Question is, how large? The current markets are willing to bet on the proposition at 0.7% (as a first approximation; in reality the rectangle of $34000 * 5% is only part of the probability distribution so it’s probably more like 0.2%). I’m not sure that many people are willing to bet against it at 0.7%; my hunch is that the people shorting it now would disappear once some threshold is passed (eg. the old $1242 all-time high) and are merely going on short and medium-term technicals.
In general, I’m hypothesizing that the Bitcoin markets have an inefficiency in that many people who are in them are already in them deeply, and so marginal additional investment even at positive expected value is a bad idea for them because in those worlds where BTC goes up a lot they would already be very rich and so they would rather optimize the remainder of their portfolio for the worlds where that doesn’t happen; essentially limitations due to risk.
A claim that would significantly work against my hypothesis is the BTC price not going up by much or at all over the next year, as Bitcoin ETFs for mainstream investors are now available.
For instance, a bitcoin detractor could argue that the reference class should also include Beanie Babies, Dutch tulips, and other similar stores of value.
True, I hadn’t thought of those. Of course, the case of Beanie Babies is more comparable to Dogecoin than Bitcoin, and the Dutch tulip story has in reality been quite significantly overblown (see http://en.wikipedia.org/wiki/Tulip_mania#Modern_views , scrolling down to “Legal Changes”). But then I suppose the reference class of “highly unique things” will necessarily include things each of which has unique properties… :)
Of course, the case of Beanie Babies is more comparable to Dogecoin than Bitcoin, and the Dutch tulip story has in reality been quite significantly overblown (see http://en.wikipedia.org/wiki/Tulip_mania#Modern_views , scrolling down to “Legal Changes”). But then I suppose the reference class of “highly unique things” will necessarily include things each of which has unique properties… :)
I think the way to go here is to assemble a larger set of potentially comparable cases. If you keep finding yourself citing different idiosyncratic distinctions (e.g. Bitcoin was the only member to be not-overblown AND have a hard cap on its supply AND get over 3B market cap AND …), this suggests that you need to be more inclusive about your reference class in order to get a good estimate.
For instance, a bitcoin detractor could argue that the reference class should also include Beanie Babies, Dutch tulips, and other similar stores of value.
The difference is that it’s easy to make more tulips or Beanie Babies, but the maximum number of Bitcoins is fixed.
There are other collectible items whose supply can’t be easily increased, Elvis Presley’s original records, for instance, or artworks in general.
Sure, new popular artists arise and increase the supply of collectible artworks, but this is like new popular altcoins arising and increasing the supply of digital currency.
The difference is that it’s easy to make more tulips or Beanie Babies, but the maximum number of Bitcoins is fixed.
Yes, this is what I mean by reference class tennis :)
Actually, according to Wikipedia, it’s hypothesized that part of the reason that tulip prices rose as quickly as they did was that it took 7-12 years to grow new tulip bulbs (and many new bulb varieties had only a few bulbs in existence). And the Beanie Baby supply was controlled by a single company. So the lines are not that sharp here, though I agree they exist.
it’s hypothesized that part of the reason that tulip prices rose as quickly as they did was that it took 7-12 years to grow new tulip bulbs
Also, one of the curious aspects of the tulip-breaking virus is that the patterns only temporarily breed true; so the supply of particular tulips is inherently limited both by how long it takes to grow them and by how many generations you’ll get before the coloring disappears from offspring. (This is why when you read about Tulipomania, you’ll usually see old illustrations of specific tulip varieties and not photos of modern plants—because they’re all gone, they no longer exist.)
Sometimes, especially in markets and other adversarial situations, inaction is secretly a way to avoid adverse selection.
Even if you’re a well-calibrated agent—so that if you randomly pick 20 events with a 5% subjective probability, one of them will happen—the set “all events where someone else is willing to trade on odds more favorable than 5%” is not a random selection of events.
Whether the Bitcoin markets are efficient enough to worry about this is an open question, but it should at least be a signal for you to make your case more robust than pulling a 5% number out of thin air, before you invest. I think the Reddit commenters were reasonable (a sentence I did not expect to type) for pointing this out, albeit uncharitably.
In my experience, this simply shifts the debate to which reference class is the best-fitting one, aka reference-class tennis. For instance, a bitcoin detractor could argue that the reference class should also include Beanie Babies, Dutch tulips, and other similar stores of value.
Thanks, I think this might actually be the argument I was looking for.
Right, so now the question is one of, does this idea of adverse selection actually apply?
I suppose one reformulation of the point made in the article is: if I believe X will happen with probability 5%, then I do not necessarily want to bet on X at 4.99% and bet against X at 5.01%, because it could be that my confidence is low enough that the very fact that someone wants to bet for or against me will shift my estimation of X in either direction outside that range.
So a safety factor is necessary. Question is, how large? The current markets are willing to bet on the proposition at 0.7% (as a first approximation; in reality the rectangle of $34000 * 5% is only part of the probability distribution so it’s probably more like 0.2%). I’m not sure that many people are willing to bet against it at 0.7%; my hunch is that the people shorting it now would disappear once some threshold is passed (eg. the old $1242 all-time high) and are merely going on short and medium-term technicals.
In general, I’m hypothesizing that the Bitcoin markets have an inefficiency in that many people who are in them are already in them deeply, and so marginal additional investment even at positive expected value is a bad idea for them because in those worlds where BTC goes up a lot they would already be very rich and so they would rather optimize the remainder of their portfolio for the worlds where that doesn’t happen; essentially limitations due to risk.
A claim that would significantly work against my hypothesis is the BTC price not going up by much or at all over the next year, as Bitcoin ETFs for mainstream investors are now available.
True, I hadn’t thought of those. Of course, the case of Beanie Babies is more comparable to Dogecoin than Bitcoin, and the Dutch tulip story has in reality been quite significantly overblown (see http://en.wikipedia.org/wiki/Tulip_mania#Modern_views , scrolling down to “Legal Changes”). But then I suppose the reference class of “highly unique things” will necessarily include things each of which has unique properties… :)
I think the way to go here is to assemble a larger set of potentially comparable cases. If you keep finding yourself citing different idiosyncratic distinctions (e.g. Bitcoin was the only member to be not-overblown AND have a hard cap on its supply AND get over 3B market cap AND …), this suggests that you need to be more inclusive about your reference class in order to get a good estimate.
The difference is that it’s easy to make more tulips or Beanie Babies, but the maximum number of Bitcoins is fixed.
There are other collectible items whose supply can’t be easily increased, Elvis Presley’s original records, for instance, or artworks in general.
Sure, new popular artists arise and increase the supply of collectible artworks, but this is like new popular altcoins arising and increasing the supply of digital currency.
Yes, this is what I mean by reference class tennis :)
Actually, according to Wikipedia, it’s hypothesized that part of the reason that tulip prices rose as quickly as they did was that it took 7-12 years to grow new tulip bulbs (and many new bulb varieties had only a few bulbs in existence). And the Beanie Baby supply was controlled by a single company. So the lines are not that sharp here, though I agree they exist.
Also, one of the curious aspects of the tulip-breaking virus is that the patterns only temporarily breed true; so the supply of particular tulips is inherently limited both by how long it takes to grow them and by how many generations you’ll get before the coloring disappears from offspring. (This is why when you read about Tulipomania, you’ll usually see old illustrations of specific tulip varieties and not photos of modern plants—because they’re all gone, they no longer exist.)