Global warming? Place your bets!

Another way of looking at the question of global warming: the way hedge fund operators do.

The nature of the business makes hedgies into odds players. Not in the sense of "I know there are no spades left in the deck, so my straight has a lock on his hand," but in the sense of "The market is pricing this hand as if there were 8 spades left in the deck whereas I know that there are only 3." Or, to shift to an investment context, the calculation is "the market is pricing Deck Industries as if it has a 30% chance of getting that contract, but my specialized knowledge of the particular processes involved leads me to believe that its chance is actually 50%," or perhaps, "this company looks like a dog, but my technical expert says there is 30%-50% chance that its patents will be crucial to some major tech players."

The bet is that Mr. Market is mis-pricing assets, in the sense that the value it puts on them does not reflect the true probabilities, and that the hedgie, for some reason, has superior insight into these true probabilities. This does not mean that the hedgie is always right - a 60% batting average is great - or that the favored horse always wins. A 10% chance is a long shot, but it wins 10% of the time. So the hedgie, like a Las Vegas casino, wants to keep making bets at favorable odds.

Ok, so how does this apply to global warming? Well, there are several competing theories about what may be causing the observed warming – increased output of greenhouse gases, increased solar output, increased (or decreased) cosmic ray flux, and so on. Any one of these could be the cause – or some or all of them, or none of them.

What do we do with this information?

One could use it to start the Sun Cycle Investment Fund. This would be a beneficent enterprise, in the same way that the bets on Tradesports are useful. There is nothing like the opportunity to place a bet at favorable odds to trigger curiosity and investigation. In fact, maybe those known contemptuously as "the deniers" should establish an on-line betting market, a la Tradesports. Surely, all the scientists, politicians and journalists who assert that CO2 theory is indisputable would be eager to bet their own 401(k) money on the proposition. (Figuring out how to resolve the bets would be a problem, though. Tradesports deals with discrete events.)