The main problem, however, is just how irrational people are about xrisks … Anyone who strongly over-estimates the probability of an xrisk can expect to gradually lose all their money if they act on that belief. But someone who under-estimates xrisk probability will not suffer until an xrisk actually happens
In which sense you are using the word “irrational” here? In the situation as you describe, it seems quite rational to bet underestimating the xrisk probability.
might be better to set up a market in near misses
Markets need to be active and liquid to provide useful information. Why would people commit capital to the market in near misses?
In which sense you are using the word “irrational” here? In the situation as you describe, it seems quite rational to bet underestimating the xrisk probability.
Both over and underestimates are irrational, but the over-estimator can expect market feedback that either corrects them or causes them to go out of business. The under-estimator cannot expect feedback except once, when it’s too late. There’s a whole host of human biases at play here—following the crowd, learning best from immediate feedback, general incompetence with low probability high impact events—that point towards xrisk probabilities being underestimated by the market.
Why would people commit capital to the market in near misses?
That seems to be the standard issue with funding futarchy betting markets in the first place. Generally it needs some outside funding to make it function.
It seems like there’s also an issue with risk aversion. In regular betting markets there are enough bets that you can win some and lose some, and the risks can average out. But if you bet substantially on x-risks, you will get only one low-probability payout. Even if you assume you’ll actually get that one (relatively large) payout, the marginal value will be greatly decreased. To avoid that problem, people will only be willing to bet small amounts on x-risks. The people betting against them, though, would be willing to make a variety of large bets (each with low payoff) and thereby carry almost no risk.
Do you think that in this particular case it’s worth drawing the difference between “making an estimate” and “making a market bet on the basis of an estimate”?
Do you think that in this particular case it’s worth drawing the difference between “making an estimate” and “making a market bet on the basis of an estimate”?
Only weakly. The probability of, eg, nuclear war, is not sufficiently low to qualify as Pascal Mugging, and investors do regularly consider things of <1% probability.
In which sense you are using the word “irrational” here? In the situation as you describe, it seems quite rational to bet underestimating the xrisk probability.
Markets need to be active and liquid to provide useful information. Why would people commit capital to the market in near misses?
Both over and underestimates are irrational, but the over-estimator can expect market feedback that either corrects them or causes them to go out of business. The under-estimator cannot expect feedback except once, when it’s too late. There’s a whole host of human biases at play here—following the crowd, learning best from immediate feedback, general incompetence with low probability high impact events—that point towards xrisk probabilities being underestimated by the market.
That seems to be the standard issue with funding futarchy betting markets in the first place. Generally it needs some outside funding to make it function.
It seems like there’s also an issue with risk aversion. In regular betting markets there are enough bets that you can win some and lose some, and the risks can average out. But if you bet substantially on x-risks, you will get only one low-probability payout. Even if you assume you’ll actually get that one (relatively large) payout, the marginal value will be greatly decreased. To avoid that problem, people will only be willing to bet small amounts on x-risks. The people betting against them, though, would be willing to make a variety of large bets (each with low payoff) and thereby carry almost no risk.
Yes. And making repeated small bets drives, in practice, the expected utility to the expected value of money, while one large bet doesn’t.
Do you think that in this particular case it’s worth drawing the difference between “making an estimate” and “making a market bet on the basis of an estimate”?
This situation resembles Pascal’s Mugging a bit.
Only weakly. The probability of, eg, nuclear war, is not sufficiently low to qualify as Pascal Mugging, and investors do regularly consider things of <1% probability.