Poker face: betting on development
Duncan Green recently wrote Honduras is building a charter city? This is never going to work which as you can tell by the title is rather skeptical about the attempt in Honduras to build a charter city along the lines proposed by Paul Romer. In the opening paragraph we offers readers to make a wager that it doesn’t work, such is his confidence.
Roving Bandit offers (kind of) to take him up on his challenge by correctly pointing out that just like in betting on poker sometimes it’s worth while betting on a long shot, if the potential reward is big enough and you have enough resources to bet on a long shot without losing everything.
“So what odds do you say Duncan? I’ll give you £10 if it fails and you give me a £1000 if it works?”
This is a very important observation because if you never bet on something untested and risky, then you would rarely be willing to invest in something new, untested and potentially risky but which could potentially yield large benefits – exactly the kind of challenge we face in development aid.
That said betting on a long shot in poker is different from doing it in the real world in two important respects:
- In poker you know whether you have won the hand – the rules of success are clear.
- In poker you might not know what cards the other player has, but you can calculate the odds and use them to guide your bids (at least according to those poker tournament shows they have on the teevee).
So going back to the Guatemala Charter City idea, although different people will have different opinions about the likely success of this enterprise, we don’t have a very clear picture neither of the real odds or the potential payoff. In addition if I were to take Duncan or Lee’s bet, how would I know if I had won or lost – what is the definition of success?
All this is a very roundabout way for me to come to the under-exploited potential of “prediction markets” for development. What if you could run a book on the potential outcome of a project investment? If you could get enough people to take bets on whether this (or any other project or initiative) is successful then you might get a much more accurate sense of the likely risk and potential benefit of this project. In order to so this you would also have to come up with a specific definition of success in terms of what happens by when.
As well as being fun for people to place a little wager, this type of approach could also tell us a lot about where to place our investments in development. Interestingly enough, while we often take our pilots projects to be make or break, in reality a failure or success of a pilot, including the current one on charter cities, doesn’t tell us whether an approach is right or wrong, it just helps us reevaluate the odds.
(for the record I agree with Duncan – but what do I know?)