We live in terrifying times. FiveThirtyEight, a statistical website, suggests that Donald Trump, a man catastrophically unfit to be the next American president, has (at the time of writing) a 32.9% chance of making it to the White House. Americans are feeling the pressure. Around half of them surveyed by the American Psychological Assocation report that the election “is a very or somewhat significant” source of stress. Luckily, economics suggests a coping strategy to deal with this election anxiety: bet that Trump will win.
This wager would act as insurance, or an “emotional hedge”. If Trump triumphs at the polls, then at least your bank balance will get a (temporary) boost. And if he loses, then the relief should dominate any feelings of regret.
I have tested this approach. On June 23rd, as the results of the British EU referendum were totted up, my nail-biting was briefly replaced with finger-tapping, as I bet £100 on Brexit. The insurance paid out, swelling my bank balance by £220.
And while I remain depressed about the final outcome, at least my hedging behaviour puts me in good company. Stephen Hawking bet Kip Thorne, another physicist, that black holes didn’t exist, so that if he found out that years of work had been a waste of time, at least he would get four years of the magazine Private Eye. And a quick survey of my (admittedly geekier than average) friends revealed several others who, terrified of a vote to leave, bet that Brexit would happen. One won more than £1,000.
This behaviour is precisely that predicted by the models I was taught as a fledgling economist. If people are rational and “risk averse”, they will shy away from extreme outcomes, and will pay to minimise extreme losses. Based on this framework, if you believe that betting markets are judging chances well, then betting on your favourite sports team seems crazy, as it makes the difference between the worst and best outcomes more extreme. After a crushing defeat, a lighter wallet is the last thing one needs.
This behaviour is admittedly rare. A newly published study by Carey Morewedge of Boston University and Simone Tang and Richard Larrick of Duke University finds that most people balk at the idea of softening the blow of their favourite team losing by betting against them. When they offered hockey fans a (free) hedge, 59% turned it down. The study also found that just 14% of the people in their experiment were willing to accept a bet against their preferred presidential candidate.
Why? Perhaps it is because human biases are nudging us away from protecting ourselves. We have a tendency to think that nice things are likelier than they really are: Hillary will surely win; Brits will surely vote to remain in the EU. With this hazy view of the future, insurance seems expensive and unnecessary.
Mr Morewedge and his coauthors say that this is probably not driving Democrats’ reluctance to bet against Hillary. Even after adjusting the odds on a bet to account for people’s optimism about their favourite candidate, the experimentees are still reluctant to accept the offer of an emotional hedge. They are also quite willing to hedge in general. When no candidate is mentioned, they are much more likely to accept a financially equivalent hedge.
A (non-economist) friend, who has spent the past few weeks arguing vigorously that Trump could yet win, explained why she still wouldn’t be hedging against it. If Trump were to win, she wouldn’t want the payout. And if forced to bet, she would probably go with Hillary so as not to be placed “in the awkward spot of feeling dirty for cashing in on something that hurts others.”
In academic-speak, Mr Morewedge and his coauthors call this a “negative self-signal”. People know that they will feel so crummy after making the bet that they don’t. In the aftermath of Brexit, the friend who won more than £1,000 still felt terrible. With my digital betting wallet flush with winnings, so did I.
There is one potential solution, which could overcome the grotty feeling associated with personally benefiting from an outcome as terrible as a Trump victory. When Mr Morewedge and his team of hedging investigators asked hockey fans to bet against their own team, most refused. But when they made the same offer, but with the winnings paid to charity, all but one accepted.
So as November 8th draws closer, draw on your inner rationalist and hedge. And rather than thinking apocalyptic thoughts, why not divert that nervous energy towards picking a charity to benefit from any Trump-related winnings. It shouldn’t be hard to identify potential losers from his presidency.