Long Bets as Charitable Giving Opportunity

Evaluating Long Bets as a prediction market shows it is dysfunctional and poorly-structured; despite the irrationality of many users, it is not good even as a way to raise money for charity.
statistics, predictions, charity, R
2017-02-242018-02-24 in progress certainty: likely importance: 5


Long Bets is a 15-year-old re­al-money pre­dic­tion mar­ket run by the Long Now Foun­da­tion for in­cen­tiviz­ing fore­cast­s/­bets about long-term events of so­cial im­por­tance such as tech­nol­ogy or the en­vi­ron­ment. I eval­u­ate use of Long Bets as a char­i­ta­ble giv­ing op­por­tu­nity by win­ning bets and di­rect­ing the earn­ings to a good char­ity by mak­ing fore­casts for all avail­able bet op­por­tu­ni­ties and rank­ing them by ex­pected value after ad­just­ing for op­por­tu­nity cost (de­fined by ex­pected re­turn of stock mar­ket in­dex­ing) and tem­po­rally dis­count­ing. I find that while there are ~41 open bets which I ex­pect have pos­i­tive ex­pected value if coun­ter-bets were ac­cept­ed, few or none of my coun­ter-bets were ac­cept­ed. In gen­er­al, LB has had al­most zero ac­tiv­ity for the past decade, and has not in­cen­tivized much fore­cast­ing. This fail­ure is likely caused by its ex­treme re­stric­tion to even-odds bets, no re­turn on bet funds (re­sult­ing in enor­mous op­por­tu­nity cost­s), and lack of main­te­nance or pub­lic­i­ty. All of these is­sues are highly likely to con­tinue bar­ring ex­ten­sive changes to Long Bets, and I sug­gest that Long Bets should be wound down.

2016 an­nual let­ter in­cludes a long sec­tion on his $1$12008m long bet with Pro­tege Part­ner­s’s Ted Sei­des that the S&P 500 in­dex will out­per­form hedge funds (as does his 2017 let­ter); un­sur­pris­ing­ly, he was about to win, and in May 2017, Sei­des con­ceded the bet, blam­ing the S&P 500 for turn­ing in its “un­ex­pected” but his­tor­i­cally av­er­age per­for­mance.

This re­minded me of in gen­eral (ab­bre­vi­ated LB; about; FAQ; rules/pro­ce­dure), a /reg­istry launched in April 2002 but which never re­ally caught on (in part be­cause their web­site was effec­tively un­us­able for sev­eral years), but is still run­ning and still re­solv­ing bets and still has any num­ber of in­-progress bets and open chal­lenges. It is one of sev­eral projects of the Long Now Foun­da­tion, but less high pro­file than oth­ers like the be­ing built for 1

For a Long Bet, to cre­ate a ‘pre­dic­tion’ one pays a $50 fee; then a chal­lenger and you put up the same bet (min­i­mum of $200) each—even odds is manda­to­ry—and des­ig­nate a pre­ferred char­i­ty, for a bet with du­ra­tion >=2 years, the bets are in­vested in a ul­tra­-con­ser­v­a­tive in­vest­ment fund (un­spec­i­fied re­turn, I’d guessti­mate 3% op­ti­misti­cal­ly), and the win­nings+in­vest­ment go to the win­ner’s char­i­ty.

Exploiting irrational bets

You can’t make money off them di­rectly be­cause of the char­ity re­stric­tion nec­es­sary to keep LB le­gal in the USA (reg­u­la­tion is why we can’t have nice things like pre­dic­tion mar­ket­s), but you could try to re­place your cur­rent char­i­ta­ble giv­ing with canny long bet­s—as it is not a pre­dic­tion mar­ket, after all, the bets can be quite ir­ra­tional. In­deed, some of the ex­ist­ing pre­dic­tions strike me as quite dumb and easy money (eg bet #312, “Turkey will join the Eu­ro­pean Union and be­come a model for a De­mo­c­ra­tic Is­lamic State and lead the way for ad­vanc­ing re­la­tions be­tween the Is­lamic world and ‘West­ern World’”, 2007–2018, which was un­likely in 2007 and has ~0% prob­a­bil­ity now). You don’t have to pay the $50 fee or worry about no one tak­ing up your chal­lenge, and you dou­ble your mon­ey, so if you wanted to do­nate $1k to , you could in­stead try to find a bet like #312 and offer a bet of $500 and, al­most cer­tainly win­ning, send ~$1000 to AMF, thereby both pro­vid­ing ac­count­abil­ity & in­creas­ing fund­ing for effec­tive char­i­ties.

One could also try to ar­gue that the bet­ting will have ad­di­tional ben­e­fits like es­tab­lish­ing a track record as a good pre­dic­tor or get­ting pub­lic­ity for one’s views, a few bets might be in­ter­est­ing as a learn­ing ex­pe­ri­ence, and tak­ing/­mak­ing bets could be use­ful as a com­pan­ion to any re­search/es­says/­books one might write as a form of ac­count­abil­i­ty.

Challenges

The down­sides would be:

  • LB in­vests funds su­per-con­ser­v­a­tive­ly, so the op­por­tu­nity cost is non­triv­ial—they defi­nitely don’t get the stan­dard 7% stock mar­ket re­turns, so one is for­feit­ing some­thing like 4–7% an­nual re­turns. (Pre­sum­ably if one thinks that spend­ing one’s money in some other way such as do­nat­ing to a char­ity right now so the char­i­ta­ble ac­tiv­i­ties can be done right away is bet­ter than in­vest­ing & do­nat­ing lat­er, one thinks the op­por­tu­nity cost is >7% and so the LB op­por­tu­nity cost is even greater than just 4%!)

    For ex­am­ple, Buffett re­ports for his bet that as of Feb­ru­ary 2017, if they had sim­ply put their [$1]($2008)m into the S&P 500 in­dex, with the cu­mu­la­tive re­turn of 85.4% it would be worth $1.854m; in other words, Buffett will win for his fa­vored char­ity lit­tle more than he would have earned if he had not used LB at all & sim­ply held the mon­ey, and sub­stan­tially less than if he had kept the money in Berk­shire Hath­away which has seen a cu­mu­la­tive re­turn of 221% (BRK.A has ap­pre­ci­ated from $145,929$110,4002007 2007-12-31 to $244,121 2017-02-27). Or to put it an­other way, by not do­ing a hand­shake bet, Buffet­t/­Sei­des gave LB a float of $1$12008m over an long time pe­riod with a large op­por­tu­nity cost2 and thus would have paid LB ~$800,000 for its ser­vice; it is not clear that this would have been money well spent, and in­deed, it turns out that Buffett did not al­low LB to hold the money but in­stead in­vested the orig­i­nal wa­ger of $827,752$640,0002008 into a US Trea­sury bond (worth $1m by 2012) & then rein­vested into Berk­shire Hath­away.3

    • the ‘long’ as­pect ex­ac­er­bates this, as the longer a bet goes on, the less likely it is that you wind up do­nat­ing more to your char­ity than just sav­ing & giv­ing later

    • 3% is op­ti­mistic, as the rules state that half of the ‘con­ser­v­a­tive’ re­turn goes to the Long Now Foun­da­tion in ad­di­tion to the $50 pre­dic­tion fee:

      The en­tire amount goes into a long-term in­vest­ment port­fo­lio called the Far­sight Fund—its as­sets are in “En­dow­ments”, a mu­tual fund man­aged by Cap­i­tal Re­search and Man­age­ment Com­pa­ny. Half of the growth of that fund is drawn off to The Long Now Foun­da­tion, which main­tains the LB ser­vice; the other half ac­crues so that the even­tual pay­ment to the win­ner’s pre­ferred char­ity may be sig­nifi­cantly larger than the orig­i­nal bet stakes.

    I asked LB for more in­for­ma­tion and they replied that they in­tend to pub­licly re­view Far­sight Fund per­for­mance at the end of 2017.

  • there are not many pre­dic­tions in gen­er­al, and only a few are added each year, of which many are clearly un­se­ri­ous de­spite the reg­is­tra­tion fee & LB’s mod­er­a­tion, lim­it­ing pos­si­ble in­vest­ments

  • all bets are 1:1, sharply up­per bound­ing how many are worth­while (eg if some­one thinks that a thing is only 60% likely and you think it’s 100% likely and they reg­is­ter a pre­dic­tion for it, you can’t do any­thing about it) and how much you can mon­ey-pump peo­ple for (only 2x)

  • many of the pre­dic­tions seem to be in­valid or out­dat­ed; bet #312 has­n’t fin­ished yet, but I think it would tech­ni­cally be in­valid to make that bet with him now be­cause a bet ex­pir­ing in 2018 can’t be at least 2 years long

    • of the valid ones which would be profitable to take, I would ex­pect most of them to back out or refuse to bet or quib­ble about tech­ni­cal­i­ties or de­lay as long as pos­si­ble; LB re­quires a $50 fee but they don’t re­quire the $200 bet to be pre­paid and you have to ne­go­ti­ate with each pre­dic­tor be­fore any bet goes into effect. So you can’t bet with most of them. (A ma­jor down­side of per­sonal bet­ting as com­pared to pre­dic­tion mar­kets is the huge fric­tion & trans­ac­tion cost­s.)
    • LB could still col­lapse or em­bez­zle it all or de­cide fla­grantly wrong (that said, the Long Now Foun­da­tion has been op­er­at­ing since 1996, for 21 years, and the lat­est Form 990 for 20144 in­di­cates their fi­nan­cial health looks good, and at least there have been no com­plaints about mis­judg­ments for the hand­ful of ex­pired bets, ~9, thus far)
  • you might be the ir­ra­tional one and see your bets go to worth­less char­i­ties (eg Buffett des­ig­nated Girls Inc as his win­ner; but that $1m is go­ing to do far less good than if it was go­ing to the Gates Foun­da­tion with the rest of Buffet­t’s mon­ey!)

  • the pub­lic­ity ben­e­fits are min­i­mal: the Buffett bet has been widely re­ported on, but be­cause of the amount and it be­ing War­ren Buffett, not be­cause LB mod­er­ates it (if any­thing, LB has ben­e­fited far more, both fi­nan­cially and pub­lic­i­ty-wise); other bets have not re­ceived much pub­lic­ity

Minimum required returns

The op­por­tu­nity cost is the big one. Since the min­i­mum is 2 years, and guessti­mat­ing 3% re­turn for the fund and us­ing the usual stock mar­ket in­dex re­turn of ~7%, you are for­feit­ing ~4% re­turn for >=2 years, so the min­i­mum op­por­tu­nity cost is or ~8.4% of your bet. That is quite a lot.

The ques­tion be­comes, even if you think you’ve found a bet you have >50% chance of win­ning (re­quired to make it +EV given the manda­tory 1:1 bet­ting), how much of an edge do you need to just out­pace the op­por­tu­nity cost?

You need to solve for p in a value ex­pres­sion like . b drops out as a con­stant, so for t = 2, you need… p = 0.54. In gen­er­al, . So even if you as­sume you are cer­tain to win, p = 1, you can’t bet any fur­ther out than ~18.19 years (so in 2017, any bet past 2035 is out of the ques­tion).

Or to put it an­other way, the lost re­turn dou­bles in 18 years (), so since you can never earn more than twice your bet on LB, past 18 years it be­comes im­pos­si­ble to earn a re­turn (be­fore, it is merely very diffi­cult).

data.frame(Year=2:19, Minimum.Win.Prob=sapply(2:19, function(t) {
    optimize(function(p) { abs(1.07^t - 2*p*1.03^t) }, seq(0,1,by=0.001))$minimum }))
# Year Minimum.Win.Prob
#    2 0.5395891434
#    3 0.5605221301
#    4 0.5822973072
#    5 0.6049417583
#    6 0.6284340139
#    7 0.6527947343
#    8 0.6781593805
#    9 0.7045338182
#   10 0.7318640396
#   11 0.7602945746
#   12 0.7898129251
#   13 0.8204982106
#   14 0.8523813174
#   15 0.8854592825
#   16 0.9198648951
#   17 0.9555596565
#   18 0.9926832986
#   19 0.9999338930
1.07^10.5
# [1] 2.034837186
data.frame(Year=2:11, Minimum.Win.Prob=sapply(2:11, function(t) {
    optimize(function(p) { abs(1.07^t - 2*p*1.00^t) }, seq(0,1,by=0.001))$minimum }))
# Year Minimum.Win.Prob
#    2     0.5724575464
#    3     0.6124911939
#    4     0.6553833666
#    5     0.7012821290
#    6     0.7503808673
#    7     0.8028891537
#    8     0.8591051279
#    9     0.9192578559
#   10     0.9836032026
#   11     0.9999338930

In the worst-case of 0% re­turn from the LB in­vest­ment fund after fees & Long Now tak­ing its half, the up­per bound is 11 years (2028).

Opportunities

Already-made Bets

As of 2017-02-25, LB has 29 reg­is­tered bets, of which 9 have fin­ished & 20 are out­stand­ing with a to­tal bal­ance (ex­clud­ing any in­vest­ment re­turns) of $1,041,800 (or $41,800 ex­clud­ing the Buffett bet). The bets ma­tur­ing soon:

  1. 2017: the Buffett in­dex vs hedge fund bet ($1000k)

  2. 2018:

  3. 2019: none

  4. 2020:

  5. 2021: none

  6. 2022: “In 2022 the US econ­omy will no longer be held to be the world leader in global en­vi­ron­men­tal degra­da­tion” ($2k)

  7. 2023: none

  8. 2024: “Dri­ver­less cars will be com­mer­cially avail­able in Las Ve­g­as, NV by May 27 2024. Trips may be point to point out­side of the city cen­ter with no re­quire­ment for any pas­sen­ger to take over man­ual con­trol of the ve­hi­cle.” ($0.5k)

  9. 2025:

  10. 2026: none

  11. 2027: none

  12. 2028: none

  13. 2029: “By 2029 no com­put­er—or ‘ma­chine in­tel­li­gence’—will have passed the Tur­ing Test” ($20k)

  14. 2030: “By 2030, com­mer­cial pas­sen­gers will rou­tinely fly in pi­lot­less planes” ($2k)

  15. 2031: none

  16. 2032: none

  17. 2033: none

  18. 2034: none

  19. 2035: none

Given the im­plied 50% prob­a­bil­i­ty, I dis­agree strongly on many of the­se, but un­for­tu­nately there is no ad­di­tional bet­ting; bets must be done on pre­dic­tions on­ly.

Expired or Invalid Bets

There are ~207 out­stand­ing pre­dic­tions but a de­cent frac­tion are il­l-de­fined, ex­pired, or ex­pir­ing too soon to reg­is­ter a bet on. Re­view­ing the ones with due dates be­fore 2035:

Ex­pired, right:

Ex­pired, wrong:

Ex­pired:

About to ex­pire: Can­not be bet on and so should be re­moved, or the pre­dic­tion needs to be edit­ed, be­cause it ma­tures in <=2 years and the LB rules man­date bets must be >=2 years long:

Should be re­moved for be­ing il­l-de­fined/un­judge­able/un­fal­si­fi­able, vague, emo­tiz­ing, mo­ron­ic, spam or just plain aw­ful:

I have emailed this list to LB so they can clean up their pre­dic­tions page; they said they will keep it in mind should they ever up­date the site.

Amus­ing­ly, even though pre­dic­tors pre­sum­ably are at least 50% con­fi­dent when they make bi­nary pre­dic­tions at 1:1 odds, by my count, over 3x as many ex­pired pre­dic­tions were false rather than true, even judg­ing gen­er­ously and skip­ping the hard­est. So, the pre­dic­tors as a whole are not just badly but sys­tem­at­i­cally over­con­fi­dent, and one could’ve made a con­sid­er­able profit just bet­ting against every­one blind­ly.

Valid and Available Predictions

I have of all kinds over thou­sands of pre­dic­tions (with 2,263 judged pre­dic­tions on Pre­dic­tion­Book alone as of 2017-05-16) and am well-cal­i­brat­ed, so for each avail­able pre­dic­tion, I will make a quick pre­dic­tion of their prob­a­bil­ity to help form my ex­pect­ed-value es­ti­mates.

This gives (ex­clud­ing all the ex­pired ones, but in­clud­ing the well-de­fined-but-moronic ones, which are winnable should the pre­dic­tor be suffi­ciently fool­ish as to ac­cept bets) as vi­able can­di­dates, go­ing by year (the main de­ter­mi­nant of profitabil­i­ty) / pre­dic­tion / ini­tial prob­a­bil­ity es­ti­mate:

Optimal selection of bets & amounts

Op­ti­mal choice of which bets to make and how much to offer is sim­pli­fied by the up­per bound of 18 years, the high prob­a­bil­ity that most bet offers will be de­clined, the in­abil­ity to rein­vest gains (s­ince all win­nings go im­me­di­ately to char­i­ty), and risk neu­tral­ity since it’s for a char­i­ty. As far as I can tell, there’s no need for ad­vanced ap­pa­ra­tus like or the ; one sim­ply takes one’s avail­able to­tal in­vest­ment, es­ti­mates the prob­a­bil­ity of win­ning to get the ex­pected val­ue, di­vides by years to get an­nual re­turn, and offers to bet every­thing on what­ever has the high­est im­plied an­nual re­turn >0%; then with what­ever is left over, one moves onto the next bet, and so on un­til one runs out of money or bets. (So one would start with the near­est ~0% pre­dic­tion­s…)

lb <- read.csv(stdin(), header=TRUE, colClasses=c("integer", "character", "factor", "numeric"))
Year,Prediction,ID,P
2020,"By 2020 a completely propellant-less (no material particles) ...",92,0.00
2020,"By 2020, 75% of all incremental new generation will come fr...",141,0.50
2020,"By 2020, GE crops will be grown on 10 fold more acreage tha...",522,0.50
2020,"By 2020, across at least 25% of the continental US, the cos...",655,0.50
2020,"By 2020, historians will agree that the start of the 21st c...",295,0.00
2020,"By 2020, in real or artificial life, sustainable evolutiona...",44,0.00
2020,"By December 31, 2020, synthetic solar energy (fusion) will ...",605,0.50
2020,"By the year 2020 solar electricity will be as cheap or chea...",76,0.50
2020,"By the year 2020 the technology will exist that will allow ...",143,0.00
2020,"By the year 2020, the tickets to space travel - at the leas...",27,0.00
2020,"China's current regime will be overthrown or reformed (anot...",588,0.02
2020,"My prediction is that artificial life; i.e., life from non-...",195,0.50
2020,"Self-replicating manufacturing machines will be commonplace...",345,0.00
2020,"The first ice-free Arctic day (as defined by NSIDC) will oc...",653,0.40
2020,"By 2020, Urban and vertical farms will replace 10% of city ...",661,0.01
2020,"Turkish president Recep Tayyip Erdogan will be found guilty...",685,0.05
2020,"The CFR (Delivered) China price of Iron Ore (62% Fe) as pub...",718,0.15
2021,"A commercial airliner will be destroyed by terrorists hacki...",615,0.05
2021,"The rate of fatalities for seafarers will be ten times that...",724,0.50
2022,"By 02022, Aether Physics (or its equivalent) will take the ...",627,0.00
2022,"In ten years, people will be watching more live video than ...",623,0.05
2023,"Patents will be abolished by at least two leading economies...",343,0.00
2023,"Roe v. Wade will not celebrate a 50th anniversary.",347,0.33
2023,"advances in personal aviation will cause the cost of land i...",433,0.00
2024,"That by 2024 'artificial' life emerging somewhere out of th...",42,0.5
2024,"US accounting and banking regulations will not require that...",149,0.50
2024,"Apple will release an electric car within the next decade.",678,0.15
2025,"A third party candidate will be elected President of the Un...",583,0.05
2025,"By 2025 at least 50% of all U.S. citizens residing within t...",106,0.01
2025,"By 2025, Albert Einstein's theory of relativity will be con...",427,0.00
2025,"By 2025, Quantum field theory will no longer be part of The...",429,0.00
2025,"By 2025, Stellar nucleosynthesis will no longer be consider...",431,0.00
2025,"By 2025, The Aether Physics Model will not have replaced qu...",432,0.00
2025,"By 2025, The giant impact hypothesis will no longer be the ...",430,0.00
2025,"By 2025, at least 25 of the 30 stocks currently in the Dow ...",112,0.50
2025,"By 2025, more than 50% of desktop computers in the world wi...",270,0.05
2025,"By 2025, new astronomical observations and theories will re...",425,0.01
2025,"By 2025, the very first human being will be cloned and this...",284,0.10
2025,"By the end of 2024 there will be a Single Global Currency m...",226,0.00
2025,"Major online internet usage research firms will record tha...",88,0.00
2025,"Neither the Google car nor any other fully autonomous car w...",656,0.20
2025,"The concept of time as a linear dimension will be replaced ...",173,0.00
2025,"The nation with the highest (nominal) GDP in the world in 2...",491,0.50
2025,"By 2025, the underground economy in the USA will be worth m...",662,0.40
2025,"By 2025, oil and gas companies will find that their carbon ...",674,0.00
2025,"Due to a favorable political & social conditions, India's e...",684,0.03
2025,"The June, 2025 Labor Force Participation Rate and unemploym...",687,0.50
2029,"By December 31 02029 one of the world's top ten car manufac...",710,0.30
2030,"..effective computerized individual citizen profiling, with...",289,0.05
2030,"A nuclear explosive weapon will be used in war or terrorism...",521,0.25
2030,"By 2030 all surgical anesthesia will be administered and mo...",43,0.3
2030,"China will break apart by 2030",297,0.05
2030,"...China will lay an ownership claim to the entire moon.",624,0.01
2030,"By 2030, 30% of libraries existing today will not have wall...",657,0.10
2030,"By 2030, the apostrophe will have functionally disappeared ...",658,0.00
2030,"That the average level of innovation between 2025 and 2035 ...",321,0.35
2030,"Iranian women will become the dominant force in Iranian pol...",659,0.02
2031,"The average annual Palmer Drought Severity Index (PDSI) com...",652,0.60
2032,"By 02032, in response to studies correlating interactive me...",629,0.10
2032,"By 2032 you will be able to purchase a mass produced car th...",622,0.70
2035,"By the year 2035 non-invasive devices will allow us to inte...",285,0.30
2035,"One or more space agencies will send a manned mission to Ma...",351,0.40
2035,"There will be a Chernobyl National Park by 2035.",511,0.33
2035,"The United States will NOT adopt a single-payer health care...",682,0.75
2035,"The amount of geologically-derived crude oil consumed by th...",726,0.50
lb$Return <- with(lb, (2*(1-P)*1.03^(Year-2017) - 1.07^(Year-2017)) / (Year-2017))
lb[order(lb$Return, decreasing=TRUE),]
#    Year                                                     Prediction  ID    P          Return
# 1  2020 By 2020 a completely propellant-less (no material particles)... 92 0.00  0.320137000000
# 5  2020 By 2020, historians will agree that the start of the 21st c... 295 0.00  0.320137000000
# 6  2020 By 2020, in real or artificial life, sustainable evolutiona...  44 0.00  0.320137000000
# 9  2020 By the year 2020 the technology will exist that will allow ... 143 0.00  0.320137000000
# 10 2020 By the year 2020, the tickets to space travel - at the leas...  27 0.00  0.320137000000
# 13 2020 Self-replicating manufacturing machines will be commonplace... 345 0.00  0.320137000000
# 15 2020 By 2020, Urban and vertical farms will replace 10% of city ... 661 0.01  0.312852153333
# 11 2020 China's current regime will be overthrown or reformed...       588 0.02  0.305567306667
# 16 2020 Turkish president Recep Tayyip Erdogan will be found guilty... 685 0.05  0.283712766667
# 17 2020 The CFR (Delivered) China price of Iron Ore (62% Fe) as pub... 718 0.15  0.210864300000
# 18 2021 A commercial airliner will be destroyed by terrorists hacki... 615 0.05  0.206917682250
# 20 2022 By 02022, Aether Physics (or its equivalent) will take the ... 627 0.00  0.183199283580
# 21 2022 In ten years, people will be watching more live video than ... 623 0.05  0.160013802094
# 22 2023 Patents will be abolished by at least two leading economies... 343 0.00  0.147895706868
# 24 2023 advances in personal aviation will cause the cost of land i... 433 0.00  0.147895706868
# 30 2025 By 2025, Albert Einstein's theory of relativity will be con... 427 0.00  0.101919247868
# 31 2025 By 2025, Quantum field theory will no longer be part of The... 429 0.00  0.101919247868
# 32 2025 By 2025, Stellar nucleosynthesis will no longer be consider... 431 0.00  0.101919247868
# 33 2025 By 2025, The Aether Physics Model will not have replaced qu... 432 0.00  0.101919247868
# 34 2025 By 2025, The giant impact hypothesis will no longer be the ... 430 0.00  0.101919247868
# 39 2025 By the end of 2024 there will be a Single Global Currency m... 226 0.00  0.101919247868
# 40 2025 Major online internet usage research firms will record tha...   88 0.00  0.101919247868
# 42 2025 The concept of time as a linear dimension will be replaced ... 173 0.00  0.101919247868
# 45 2025 By 2025, oil and gas companies will find that their carbon ... 674 0.00  0.101919247868
# 29 2025 By 2025 at least 50% of all U.S. citizens residing within t... 106 0.01  0.098752322664
# 37 2025 By 2025, new astronomical observations and theories will re... 425 0.01  0.098752322664
# 46 2025 Due to a favorable political & social conditions, India's e... 684 0.03  0.092418472258
# 28 2025 A third party candidate will be elected President of the Un... 583 0.05  0.086084621851
# 36 2025 By 2025, more than 50% of desktop computers in the world wi... 270 0.05  0.086084621851
# 38 2025 By 2025, the very first human being will be cloned and this... 284 0.10  0.070249995833
# 27 2024     Apple will release an electric car within the next decade. 678 0.15  0.069286299249
# 55 2030 By 2030, the apostrophe will have functionally disappeared ... 658 0.00  0.040555571286
# 41 2025 Neither the Google car nor any other fully autonomous car w... 656 0.20  0.038580743799
# 53 2030       ...China will lay an ownership claim to the entire moon. 624 0.01  0.038296288650
# 57 2030 Iranian women will become the dominant force in Iranian pol... 659 0.02  0.036037006014
# 49 2030 ..effective computerized individual citizen profiling, with... 289 0.05  0.029259158105
# 52 2030                                 China will break apart by 2030 297 0.05  0.029259158105
# 14 2020 The first ice-free Arctic day (as defined by NSIDC) will oc... 653 0.40  0.028743133333
# 54 2030 By 2030, 30% of libraries existing today will not have wall... 657 0.10  0.017962744925
# 23 2023             Roe v. Wade will not celebrate a 50th anniversary. 347 0.33  0.016549954250
# 59 2032 By 02032, in response to studies correlating interactive me... 629 0.10  0.003020653944
# 50 2030 A nuclear explosive weapon will be used in war or terrorism... 521 0.25 -0.015926494616
# 48 2029 By December 31 02029 one of the world's top ten car manufac... 710 0.30 -0.021343862281
# 44 2025 By 2025, the underground economy in the USA will be worth m... 662 0.40 -0.024757760271
# 51 2030 By 2030 all surgical anesthesia will be administered and mo...  43 0.30 -0.027222907797
# 56 2030 That the average level of innovation between 2025 and 2035 ... 321 0.35 -0.038519320977
# 2  2020 By 2020, 75% of all incremental new generation will come fr... 141 0.50 -0.044105333333
# 3  2020 By 2020, GE crops will be grown on 10 fold more acreage tha... 522 0.50 -0.044105333333
# 4  2020 By 2020, across at least 25% of the continental US, the cos... 655 0.50 -0.044105333333
# 7  2020 By December 31, 2020, synthetic solar energy (fusion) will ... 605 0.50 -0.044105333333
# 8  2020 By the year 2020 solar electricity will be as cheap or chea...  76 0.50 -0.044105333333
# 12 2020 My prediction is that artificial life; i.e., life from non-... 195 0.50 -0.044105333333
# 19 2021 The rate of fatalities for seafarers will be ten times that... 724 0.50 -0.046321800000
# 25 2024 That by 2024 'artificial' life emerging somewhere out of th...  42 0.50 -0.053701087293
# 26 2024 US accounting and banking regulations will not require that... 149 0.50 -0.053701087293
# 61 2035 By the year 2035 non-invasive devices will allow us to inte... 285 0.30 -0.055362555000
# 35 2025 By 2025, at least 25 of the 30 stocks currently in the Dow ... 112 0.50 -0.056427012306
# 43 2025 The nation with the highest (nominal) GDP in the world in 2... 491 0.50 -0.056427012306
# 47 2025 The June, 2025 Labor Force Participation Rate and unemploym... 687 0.50 -0.056427012306
# 63 2035               There will be a Chernobyl National Park by 2035. 511 0.33 -0.061037331871
# 62 2035 One or more space agencies will send a manned mission to Ma... 351 0.40 -0.074278477902
# 65 2035 The amount of geologically-derived crude oil consumed by th... 726 0.50 -0.093194400805
# 58 2031 The average annual Palmer Drought Severity Index (PDSI) com... 652 0.60 -0.097747312166
# 60 2032 By 2032 you will be able to purchase a mass produced car th... 622 0.70 -0.121616739384
# 64 2035 The United States will NOT adopt a single-payer health care... 682 0.75 -0.140484208062

I be­gan offer­ing bets with a cap­i­tal of $1200 with AMF as the ben­e­fi­cia­ry, roughly what I in­tended to do­nate in 2017. Offered bets:

  1. 2017-04-24: #143, “By the year 2020 the tech­nol­ogy will ex­ist that will al­low for the ‘fax­ing’ (tele­por­ta­tion—send­ing/re­ceiv­ing) of ac­tual inan­i­mate ob­jects, such as text books, cloth­ing, jew­elry and the like.”, Rob Schnitzer

  2. 2017-05-02: #345, “Self­-repli­cat­ing man­u­fac­tur­ing ma­chines will be com­mon­place by 2020”, Adrian Bowyer

  3. 2017-05-11: #661, “By 2020, Ur­ban and ver­ti­cal farms will re­place 10% of city pro­duce in Chica­go.”, Ed Hub­bard

  4. 2017-05-16: #685, “Turk­ish pres­i­dent Re­cep Tayyip Er­do­gan will be found guilty at a court of law or will flee from the coun­try by 2020.”, Ibrahim Okuyucu

    Ibrahim ex­pressed in­ter­est in ac­cept­ing on 2017-05-19, and we be­gan ne­go­ti­at­ing up­dated terms.

Long Bets future

Status and accomplishment

Ex­am­in­ing the full set of pre­dic­tions, the to­tal ac­tiv­ity on LB can be de­scribed as rang­ing from slim to none: the ser­vice is es­sen­tially sta­tic as it re­ceives no new pre­dic­tions, no new bets, and not even com­ments on ex­ist­ing bets.

In­deed, with the ex­pi­ra­tion of the Buffett bet, LB will have a grand to­tal of ~20 bets ac­tive (9 ex­pired), and, inas­much as the Buffett bet rep­re­sents ~94% of all out­stand­ing bet funds (al­beit not un­der the con­trol of LB, see pre­vi­ous about Buffett con­trol­ling & in­vest­ing his bet’s stake), col­lapse to a to­tal out­stand­ing sum of ~$60k. One has to won­der if this is enough to even op­er­ate the “Far­sight Fund” with, as even with ~3% re­turns, the an­nual re­turn would be some­where <$2k, of which half goes to LB.

This im­plies that LB has seen, over its 15 year lifes­pan, 1.9 bets per year; and, since the ma­jor­ity date to 2002–2005 after its launch, few bets post-2005 (~10), or 0.8 bets per year.

Nor have the bets, aside from the Buffett bet, prompted any sub­stan­tial me­dia in­ter­est or changed dis­cus­sions. (A­side from the lack of com­ments or gen­eral ac­tiv­ity on the site it­self, we can also look at Wikipedia search queries—al­most im­mea­sur­ably small and sev­eral of which were prob­a­bly me—and at Google Trends, world­wide search trends never ex­ceed 100 searches a day and av­er­age ~25 all the way back to 2004; on Google News, I could not find any men­tions of “Long Bets” which weren’t nor­mal ex­pres­sions; and even on Hacker News, where the orig­i­nal coder of the LB site ap­par­ently hangs out, there are few men­tions of it which aren’t pro­voked by on­go­ing in­ter­est in the Buffett bet.)

Com­pared to other pre­dic­tion mar­kets such as In­trade, Good Judg­ment Pro­ject, or Pre­dic­tIt, LB has had or­ders of mag­ni­tude fewer par­tic­i­pants, con­tracts, or wa­gered amounts. (Even in­di­vid­ual In­trade con­tracts, such as Obama win­ning re-elec­tion in 2012, often had an or­der of mag­ni­tude more vol­ume than LB’s life­time to­tal, and just the 2012 pres­i­den­tial elec­tion on In­trade alone rep­re­sented $$2912302012 mil­lion, or >100x more.)

So over the past 15 years, de­spite a splashy launch with cov­er­age in and well-con­nected par­tic­i­pants, LB has sank like a stone, is al­most to­tally in­ac­tive, and with the ex­pi­ra­tion of the Buffett bet, even less at­ten­tion will be paid to it.

Should Long Bets continue to exist?

This raises a se­ri­ous ques­tion: should LB con­tinue to ex­ist at all?

Has LB changed any con­ver­sa­tions or had any ma­te­r­ial im­pact on the world worth the con­sid­er­able in­vest­ment by Long Now Foun­da­tion & prin­ci­pals to cre­ate, launch, and main­tain it? LB is of course in a bet­ter po­si­tion to say this than I am, but as far as I can tell (s­peak­ing as some­one closely in­ter­ested in LB since its 2002 launch and who has made pre­dic­tions on most of the LB top­ics on Pre­dic­tion­Book.­com as part of ), I would have to say no.

It is true that by the na­ture of their long-term goals, Long Now Foun­da­tion projects can­not and should not be eval­u­ated on an­nual met­rics or killed off-hand­ed­ly, but LB is fron­t-loaded in the sense that bets must be made be­fore the long fu­ture hap­pens in or­der to have any effects on dis­cus­sion or fos­ter ac­count­abil­i­ty. From this per­spec­tive, from the lack of dis­cus­sion now and the lack of bet­ting ac­tiv­i­ty, no one is be­ing held ac­count­able for any­thing in the near or mid-term fu­ture; so it is crys­tal-clear that as of April 2017, LB has failed. Even if LB were to ex­pe­ri­ence a sud­den burst of ac­tiv­ity in 2017 (not that I can imag­ine why or who it would be by), it would still be many years be­fore any new bets ma­tured and ac­count­abil­ity was pos­si­ble This is a trend that has been clearly vis­i­ble since at least 2005, and over a decade lat­er, noth­ing has changed and with the end of the Buffett bet, pub­lic in­ter­est in LB will de­cline even fur­ther.

No or­ga­ni­za­tion can afford to run failed ser­vices in­defi­nitely at the ex­pense of oth­er, much more suc­cess­ful projects such as the Clock of the Long Now. Par­tic­u­larly not non-profits. LB is par­a­sitic on the Long Now Foun­da­tion’s re­sources & ac­tiv­i­ties; with the dis­ap­pear­ance of the float from the Buffett bet, the fees likely will not even cover a part-time em­ployee work­ing 2 weeks a year on LB-re­lated mat­ters such as main­te­nance or judg­ing.

So the Long Now Foun­da­tion has 3 op­tions:

  1. main­tain the LB sta­tus quo as a zom­bie site limp­ing along, un­mod­er­at­ed, with near-zero ac­tiv­i­ty, get­ting per­haps 1 or 2 bets in a good year, steadily drain­ing Foun­da­tion la­bor and in­creas­ing over­head, for no par­tic­u­lar ben­e­fit other than stub­born­ness.

  2. shut down LB

    As LB has so few bets, this would be easy. LB can sim­ply close bets which are clearly go­ing to be won by one side, and can ‘push’ all bets where it’s un­clear who will win by trans­fer­ring the funds to the pre-des­ig­nated char­i­ties. This is per­mit­ted by the le­gal agree­ment signed by all bet­tors, and they can hardly com­plain if their fa­vored char­i­ties get the funds ear­lier than ex­pected (and the char­i­ties them­selves will be very pleased to have the money ear­ly, be­cause of the op­por­tu­nity cost, be­fore too much time has been wasted or in­fla­tion evis­cer­ated the do­na­tion­s). Then the site can be con­verted to a sta­tic HTML site for his­tor­i­cal archive pur­pos­es.5 Long Now Foun­da­tion can then mon­i­tor on­go­ing at­tempts to fill the pre­dic­tion mar­ket niche such as , or de­cen­tral­ized cryp­tocur­ren­cy-based projects like Hive­Mind/ & Gno­sis, and use them, ei­ther by back­ing par­tic­u­lar con­tracts and serv­ing as an or­a­cle/­judge (in cen­tral­ized mod­els like Pre­dic­tIt or Gno­sis) or by en­dors­ing & sub­si­diz­ing con­tracts (Hive­Mind/Au­gur).

  3. in­vest in LB fur­ther and at­tempt to re­vi­tal­ize or re­boot it

Fixes

What could the Long Now Foun­da­tion do to im­prove?

  • re­move the ar­bi­trary and un­nec­es­sary even-odds re­stric­tion. There is no le­gal re­quire­ment for this that I am aware of, and it bizarrely lim­its what bets can be made and also elim­i­nates any mean­ing­ful ex­pres­sion of con­fi­dence. Two peo­ple who think an event might hap­pen with 40% and 60% can make bets, but two peo­ple who think 50% and 100% can’t!

  • a non-con­ser­v­a­tive in­vest­ment fund, and specifi­cal­ly, a global Van­guard stock mar­ket in­dex: the ‘low risk’ in­vest­ment ve­hi­cle is coun­ter­pro­duc­tive, un­nec­es­sary, and risky:

    1. coun­ter­pro­duc­tive: the low re­turn makes it ir­re­spon­si­ble and un­eth­i­cal to reg­is­ter pre­dic­tions, par­tic­u­larly for long-dated pre­dic­tions, dis­cour­ag­ing any­one se­ri­ous about char­ity & the fu­ture from us­ing LB

    2. un­nec­es­sary:

      • legal­ly: as LB makes clear, it has no le­gal oblig­a­tion to the ‘bet­tors’, who are ac­tu­ally do­na­tors to the Long Now Foun­da­tion, to pay any­thing to the des­ig­nated char­i­ties, much less at a par­tic­u­lar re­turn
      • moral­ly: do­na­tors should be risk-neu­tral and seek to max­i­mize their even­tual im­pact, so trad­ing off enor­mous long-term growth for some re­duc­tion in volatil­ity re­duces the ex­pected value of do­nat­ing/­bet­ting
      • fi­nan­cial­ly: for short­-term bets, most bets are <=$1k, and the pos­si­ble loss triv­ially small ei­ther as a frac­tion of ei­ther the Long Now Foun­da­tion’s as­sets or an­nual rev­enue so it can sim­ply self­-in­sure (or ask one of its wealthy donors to guar­an­tee it); for medi­um-term bets, fluc­tu­a­tions down­ward can be com­pen­sated for by bor­row­ing from long-term bets; and for long-term bets (which may be cen­turies away from ma­tur­ing), that very as­pect im­plies that the fi­nal in­vest­ment will far ex­ceed the nom­i­nal bet and con­verge on the long-term av­er­ages of 7% an­nu­ally (as in­deed LB’s largest and most promi­nent bet demon­strates on a much shorter time-s­cale!)
    3. and risky: con­ser­v­a­tive ‘safe’ in­vest­ments mak­ing bet­ting highly un­at­trac­tive caus­ing lack of use is it­self a highly risky in­vest­ment (where do they go if the Long Now Foun­da­tion shuts down LB or it­self dis­solves?); low growth rates in ‘safe’ in­vest­ments com­mit the fal­lacy in­her­ent in the “pre­cau­tion­ary prin­ci­ple” by be­ing in­trin­si­cally risky as they build up no re­serves against ran­dom shocks and ex­tra­or­di­nary ex­pens­es, en­tire classes of in­vest­ments be­ing ze­roed out by dis­as­ters or hy­per­in­fla­tion.

      It is worth not­ing that many classes of bond hold­ers through­out in­vest­ing his­tory have failed to out­pace in­fla­tion & tax­a­tion, or been sim­ply ze­roed out (Credit Su­isse 2013), and in the long run, “safe” as­sets re­turns have been ex­tremely low and more volatile than so-called “risky as­sets” (Jordà et al 2017). As War­ren Buffett re­marks in his 2011 an­nual let­ter and again in his 2017 an­nual let­ter, in­vest­ments in pro­duc­tive eq­ui­ties & busi­ness rather than bonds or com­modi­ties are not just lu­cra­tive in the long run but they “will be by far the safest.”67 This is not sur­pris­ing, con­sid­er­ing the long-term av­er­age real re­turn rates cal­cu­lated by Jordà et al 2017 of 1.94% vs 4.64% over 16 coun­tries 1870–2014 (surely a long and event­ful time pe­ri­od), im­ply­ing that an ‘risky’ eq­uity in­vest­ment would yield a to­tal re­turn 44x than an eq­uity one8, which clearly would be much safer in any mean­ing­ful sense of the term.

  • real mod­er­a­tion: many pre­dic­tions should never have been ap­proved, and even the de­cent ones often need to be tight­ened up and made more ob­jec­tive & fal­si­fi­able; it’s ab­surd to charge $50 to sub­mit a pre­dic­tion and then let through crack­pot­tery and out­right balder­dash like “The con­cept of time as a lin­ear di­men­sion will be re­placed by one of time as a po­lar­ity be­tween con­tent and con­text”. (How could any­one take such a site se­ri­ous­ly?)

    • pos­si­bly re­quire min­i­mum bets to be paid up front, to avoid peo­ple de­lib­er­ately weasel­ing out or be­ing in­cen­tivized to kill ne­go­ti­a­tions with prospec­tive bet­tors; since in the­o­ry, peo­ple mak­ing pre­dic­tions are will­ing to bet money on the pre­dic­tion they are mak­ing, they should have no grounds to ob­ject. If no bet­tors ap­pear, the money can be kept un­til ex­pi­ra­tion and then do­nated to the pre­dic­tor’s pre-spec­i­fied char­i­ty. (This mech­a­nism would be far more ap­peal­ing with the in­vest­ment fund fixed.)
  • more ac­tive pro­mo­tion by Long Now Foun­da­tion mem­bers, di­rec­tors, and promi­nent donors: look­ing over the bet dates, many date from a nar­row time pe­riod in the early 2000s, after which LB ap­pears to’ve fallen into ob­scu­rity and gone dor­mant; but many of the peo­ple on the Long Now board or who have been in­volved in Long Now are well-off, do­nate to char­ity reg­u­lar­ly, and re­main heav­ily in­volved in writ­ing and ac­tivism on is­sues rang­ing from tech­no­log­i­cal un­em­ploy­ment to nu­clear power to the Russ­ian In­ter­net—thus, they could eas­ily route their char­i­ta­ble giv­ing through long bets on top­ics of cur­rent in­ter­est, as well as elim­i­nat­ing the worse pre­dic­tions & en­forc­ing a ba­sic level of san­ity and se­ri­ous­ness

  • com­mu­nica­tive more clearly to the pub­lic what Long Now Foun­da­tion projects are ac­tu­ally ac­tive, and what con­crete progress is be­ing made; the Long Now web­site cur­rently fails at this, as it ap­par­ently is de­voted to telling peo­ple about talks they can­not at­tend (and which are never made avail­able on­line) and im­prove­ments at a bar they can­not drink at, while peo­ple are more in­ter­ested in things like progress on the Rosetta stones or the Clock


  1. Al­though it’s not al­ways clear how ac­tive any of the projects are, ex­cept their bar and talk­s—they are very proud of their bar & talks and the web­site is fre­quently up­dated about them.↩︎

  2. Buffett re­peat­edly em­pha­sizes in his let­ters that one of the keys to Berk­shire Hath­away’s busi­ness suc­cess is its in­sur­ers, who in turn are en­abled by the ‘float’ of in­sur­ance pre­mi­ums which are paid long be­fore any claims are made, and this ‘free’ money can be in­vested as Buffett wish­es; so the cost of giv­ing LB $1$12008m for such an ex­tended time surely was not lost on him. Sim­i­lar­ly, he notes in his 2013 an­nual let­ter that his es­tate will not be put into a long-term fund for in­vest­ment but will be dis­trib­uted for phil­an­thropic in­vest­ment as quickly as pos­si­ble: “all of my Berk­shire shares will be fully dis­trib­uted to cer­tain phil­an­thropic or­ga­ni­za­tions over the ten years fol­low­ing the clos­ing of my es­tate”.↩︎

  3. At this point, one has to won­der what func­tion LB plays in the bet at all, if it does not hold the funds, does not in­vest them in its Fore­sight Fund, and Buffett (not LB) is the one with ac­cess to the con­fi­den­tial au­dited re­sults from the hedge fund side of the bet in or­der to judge re­sults?↩︎

  4. The Long Now Foun­da­tion does­n’t pro­vide its Form 990s on­line, so I have copied them from Cit­i­zenAu­dit.org: 2001 / 2002 / 2003 / 2004 / 2005 / 2006 / 2007 / 2008 / 2009 / 2010 / 2011 / 2012 / 2013 / 2014.↩︎

  5. Or sim­ply taken down; I have al­ready .↩︎

  6. pg18–19, Buffett 2011 (em­pha­sis in orig­i­nal):

    In­vest­ments that are de­nom­i­nated in a given cur­rency in­clude mon­ey-mar­ket funds, bonds, mort­gages, bank de­posits, and other in­stru­ments. Most of these cur­ren­cy-based in­vest­ments are thought of as “safe.” In truth they are among the most dan­ger­ous of as­sets. Their beta may be ze­ro, but their risk is huge. Over the past cen­tury these in­stru­ments have de­stroyed the pur­chas­ing power of in­vestors in many coun­tries, even as the hold­ers con­tin­ued to re­ceive timely pay­ments of in­ter­est and prin­ci­pal. This ugly re­sult, more­over, will for­ever re­cur…Even in the U.S., where the wish for a sta­ble cur­rency is strong, the dol­lar has fallen a stag­ger­ing 86% in value since 1965, when I took over man­age­ment of Berk­shire. It takes no less than $$972011 to­day to buy what $$611965 did at that time. Con­se­quent­ly, a tax-free in­sti­tu­tion would have needed 4.3% in­ter­est an­nu­ally from bond in­vest­ments over that pe­riod to sim­ply main­tain its pur­chas­ing pow­er. Its man­agers would have been kid­ding them­selves if they thought of any por­tion of that in­ter­est as “in­come.”… Cur­rent rates, how­ev­er, do not come close to off­set­ting the pur­chas­ing-power risk that in­vestors as­sume. Right now bonds should come with a warn­ing la­bel… To­day, a wry com­ment that Wall Streeter Shelby Cul­lom Davis made long ago seems apt: “Bonds pro­moted as offer­ing risk-free re­turns are now priced to de­liver re­turn-free risk.”

    …My own pref­er­ence—and you knew this was com­ing—is our third cat­e­go­ry: in­vest­ment in pro­duc­tive as­sets, whether busi­ness­es, farms, or real es­tate. Ide­al­ly, these as­sets should have the abil­ity in in­fla­tion­ary times to de­liver out­put that will re­tain its pur­chas­ing-power value while re­quir­ing a min­i­mum of new cap­i­tal in­vest­ment. Farms, real es­tate, and many busi­nesses such as Co­ca-Co­la, IBM and our own See’s Candy meet that dou­ble-bar­reled test. Cer­tain other com­pa­nies—­think of our reg­u­lated util­i­ties, for ex­am­ple—­fail it be­cause in­fla­tion places heavy cap­i­tal re­quire­ments on them. To earn more, their own­ers must in­vest more. Even so, these in­vest­ments will re­main su­pe­rior to non­pro­duc­tive or cur­ren­cy-based as­sets. Whether the cur­rency a cen­tury from now is based on gold, seashells, shark teeth, or a piece of pa­per (as to­day), peo­ple will be will­ing to ex­change a cou­ple of min­utes of their daily la­bor for a Co­ca-Cola or some See’s peanut brit­tle. In the fu­ture the U.S. pop­u­la­tion will move more goods, con­sume more food, and re­quire more liv­ing space than it does now. Peo­ple will for­ever ex­change what they pro­duce for what oth­ers pro­duce.

    Our coun­try’s busi­nesses will con­tinue to effi­ciently de­liver goods and ser­vices wanted by our cit­i­zens. Metaphor­i­cal­ly, these com­mer­cial “cows” will live for cen­turies and give ever greater quan­ti­ties of “milk” to boot. Their value will be de­ter­mined not by the medium of ex­change but rather by their ca­pac­ity to de­liver milk. Pro­ceeds from the sale of the milk will com­pound for the own­ers of the cows, just as they did dur­ing the 20th cen­tury when the Dow in­creased from 66 to 11,497 (and paid loads of div­i­dends as well). Berk­shire’s goal will be to in­crease its own­er­ship of first-class busi­ness­es. Our first choice will be to own them in their en­tire­ty—but we will also be own­ers by way of hold­ing siz­able amounts of mar­ketable stocks. I be­lieve that over any ex­tended pe­riod of time this cat­e­gory of in­vest­ing will prove to be the run­away win­ner among the three we’ve ex­am­ined. More im­por­tant, it will be by far the safest.

    ↩︎
  7. pg 12–14, dis­cussing the rea­son Buffett & his bet­tor agreed to sell the orig­i­nal US Trea­sury back­ing the bet for BRK shares (all em­pha­sis in orig­i­nal):

    Orig­i­nal­ly, Pro­tégé and I each funded our por­tion of the ul­ti­mate $1 mil­lion prize by pur­chas­ing $660,908$500,0002007 face amount of ze­ro-coupon U.S. Trea­sury bonds (some­times called “strips”). These bonds cost each of us $420,668$318,2502007—a bit less than 64¢ on the dol­lar—with the $500,000 payable in ten years.

    As the name im­plies, the bonds we ac­quired paid no in­ter­est, but (be­cause of the dis­count at which they were pur­chased) de­liv­ered a 4.56% an­nual re­turn if held to ma­tu­ri­ty. Pro­tégé and I orig­i­nally in­tended to do no more than tally the an­nual re­turns and dis­trib­ute $1 mil­lion to the win­ning char­ity when the bonds ma­tured late in 2017.

    After our pur­chase, how­ev­er, some very strange things took place in the bond mar­ket. By No­vem­ber 2012, our bond­s—now with about five years to go be­fore they ma­tured—were sell­ing for 95.7% of their face val­ue. At that price, their an­nual yield to ma­tu­rity was less than 1%. Or, to be pre­cise, 0.88%.

    Given that pa­thetic re­turn, our bonds had be­come a dum­b—a re­ally dum­b­—in­vest­ment com­pared to Amer­i­can eq­ui­ties. Over time, the S&P 500—which mir­rors a huge cross-sec­tion of Amer­i­can busi­ness, ap­pro­pri­ately weighted by mar­ket val­ue—has earned far more than 10% an­nu­ally on share­hold­ers’ eq­uity (net worth).

    In No­vem­ber 2012, as we were con­sid­er­ing all this, the cash re­turn from div­i­dends on the S&P 500 was 2.5% an­nu­al­ly, about triple the yield on our U.S. Trea­sury bond. These div­i­dend pay­ments were al­most cer­tain to grow. Be­yond that, huge sums were be­ing re­tained by the com­pa­nies com­pris­ing the 500. These busi­nesses would use their re­tained earn­ings to ex­pand their op­er­a­tions and, fre­quent­ly, to re­pur­chase their shares as well. Ei­ther course would, over time, sub­stan­tially in­crease earn­ings-per-share. And—as has been the case since 1776—what­ever its prob­lems of the min­ute, the Amer­i­can econ­omy was go­ing to move for­ward.

    Pre­sented late in 2012 with the ex­tra­or­di­nary val­u­a­tion mis­match be­tween bonds and eq­ui­ties, Pro­tégé and I agreed to sell the bonds we had bought five years ear­lier and use the pro­ceeds to buy 11,200 Berk­shire “B” shares. The re­sult: Girls Inc. of Om­aha found it­self re­ceiv­ing [$2,222,279]($2017) last month rather than the $1 mil­lion it had orig­i­nally hoped for.

    Berk­shire, it should be em­pha­sized, has not per­formed bril­liantly since the 2012 sub­sti­tu­tion. But bril­liance was­n’t need­ed: After all, Berk­shire’s gain only had to beat that an­nual 0.88% bond bo­gey—hardly a Her­culean achieve­men­t…After that kinder­garten-like analy­sis, Pro­tégé and I made the switch and re­laxed, con­fi­dent that, over time, 8% was cer­tain to beat 0.88%. By a lot.

    …In­vest­ing is an ac­tiv­ity in which con­sump­tion to­day is fore­gone in an at­tempt to al­low greater con­sump­tion at a later date. “Risk” is the pos­si­bil­ity that this ob­jec­tive won’t be at­tained.

    By that stan­dard, pur­port­edly “risk-free” long-term bonds in 2012 were a far riskier in­vest­ment than a long-term in­vest­ment in com­mon stocks. At that time, even a 1% an­nual rate of in­fla­tion be­tween 2012 and 2017 would have de­creased the pur­chas­ing-power of the gov­ern­ment bond that Pro­tégé and I sold.

    I want to quickly ac­knowl­edge that in any up­com­ing day, week or even year, stocks will be riskier—­far riskier—than short­-term U.S. bonds. As an in­vestor’s in­vest­ment hori­zon length­ens, how­ev­er, a di­ver­si­fied port­fo­lio of U.S. eq­ui­ties be­comes pro­gres­sively less risky than bonds, as­sum­ing that the stocks are pur­chased at a sen­si­ble mul­ti­ple of earn­ings rel­a­tive to then-pre­vail­ing in­ter­est rates.

    It is a ter­ri­ble mis­take for in­vestors with long-term hori­zon­s—a­mong them, pen­sion funds, col­lege en­dow­ments and sav­ings-minded in­di­vid­u­al­s—to mea­sure their in­vest­ment “risk” by their port­fo­lio’s ra­tio of bonds to stocks. Often, high­-grade bonds in an in­vest­ment port­fo­lio in­crease its risk.

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  8. Over the 145 year pe­ri­od, the mean re­turns from Ta­ble 3, pg13 (ge­o­met­ric mean of real re­turns in full sam­ple), im­ply a com­pounded re­turn of for bonds, for eq­ui­ties, and .↩︎