I Win My Long-Run Gas Price Bet

I Win My Long-Run Gas Price Bet, by Bryan Caplan.

In July of 2008, the average U.S. price of regular gasoline was $4.062.  As usual, global hysteria followed.  And as usual, I was unperturbed.  So unperturbed, in fact, that I made the following bet with Tyler Cowen and David Balan:

I will bet $100, even odds, that the U.S. price of gas (including taxes) in the first week of January, 2018 will be $3.00 or less in 2008 dollars. …

In January of 2018, the average price was a mere $2.555. I have therefore won this bet …

Now what was this bet really about? Back in 2008, Tyler argued that there was a deep intellectual error in the work of Julian Simon … Why was Tyler so dismissive? As far as I can understand, he thinks that basic arbitrage theory implies that there can’t be predictable price patterns. My view, in contrast, is that there are many conditions that undermine the power of arbitrage. So if we see a 150-year price pattern, it’s perfectly reasonable to expect it to continue.

And what is that pattern for gasoline? For as long as we’ve had data, gas prices have shown frequent spikes, followed by gradual declines back to long-run trend. So when prices spiked to over $4.00, I expected the past to repeat itself. And repeat itself it did.

I expect that Tyler will insist that I just got lucky. And if I lost roughly half my bets, that would be a wise reaction. However, this latest victory brings my betting record to 17 wins and 0 losses. …

Two key practices account for most of my success.

1. I take the “outside view.” When predicting, I start with long-run averages, and presume the “latest news” is distracting trivia. …

2. I spurn hyperbole.  Human beings adore superlatives, but superlatives rarely apply to the real world.  So when I notice someone treating hyperbolic poetry as literal truth, I rush to wager.  For example, when John Podhoretz asserted that the Iran nuclear deal “effectively ensures that it will be a nuclear state with ballistic missiles in 10 years,” I smelled hyperbole, and tried in vain to entice him put some money on it.

In slogan form: I owe my track record to numeracy and normalcy.  Step back, calm down, look at the numbers, and target thinkers who say, “This time it’s different.”

hat-tip Matthew