Compare Refuge, Resort

Wednesday I gave a brief talk (audio, slides) at the annual meeting of the Society for Risk Analysis. It seems many risk analysts are like futurists in disliking numerical/probability estimates, preferring to qualitatively discuss “scenarios.” They note one can’t think of all possible relevant events, and point to past numerical estimates that now seem way off.

My talk was on a concrete way to get numerical estimates on extreme risks: refuge futures. I’ve given the subject a bit more thought since I talked on it a few years ago; here is my current concept.

Create a set of underground refuges against disaster, some near major transport access points. For example, a $2 Million shelter can hold 36 people with air, water, food, power for 4 years, at less than $14K per person-year. Near each refuge create a matching resort, which supports a comparably utilitarian lifestyle, but does not protect much against disaster. For example, imagine a cheap hotel near an airport, with a refuge dug below it.

Create and sell transferable tickets representing the right of qualified amateurs to stay in those refuges or resorts on particular future dates. Refuges maintain a multi-year supply of food and power, and are staffed by experts who decide when a disaster justifies sealing it. Qualified folks can use their tickets for a date by showing up at the matching resort; they’ll then be escorted to its matching refuge. Those who are in a refuge when it is sealed remain there until its experts decide to unseal it.

The price of a ticket to a particular refuge on a particular date should vary with the estimated chance of a serious disaster near that date and location. But that price should also vary with other factors, such as interest rates, general wealth levels, the local economy, the total supply of related refuge slots, the risk a ticket holder might fail to arrive in time to use a ticket, and the risk that refuge administrators might not honor valid tickets. How can we disentangle these effects?

Regarding variations in interest rates, general wealth, and local growth, such factors could be roughly corrected for via comparing refuge and resort ticket prices. That is, subsidize a market maker who trades of refuge for resort tickets in some ratio. (Ticket fractions could be a random chance of getting a ticket.) The number of resort tickets required to buy a single refuge ticket could be our key disaster indicator.

While an estimate of how disaster risks vary across space and time would be interesting, it would be far more useful to know how disaster risks vary with events, especially relevant decisions. For example, imagine policy-makers were considering a new geo-engineering program. We could then create conditional tickets, such as tickets to a refuge valid on a date only if this new program was begun by some specified prior date. This would allow folks to trade conditional refuge tickets for conditional resort tickets.

The number of conditional resort tickets required to buy a conditional refuge ticket would be a disaster indicator for that condition. If the disaster indicator was lower given the adoption of a geo-engineering policy than given not adopting it, this would suggest that the geo-engineering policy reduces the chance of serious disaster. The possibility of obtaining such valuable policy info would be a major reason to created this whole refuge-resort ticket system.

Regarding the risk of failing to show up to use a refuge ticket, for each slot available we could sell several tickets at different priority levels. If not all first priority tickets holders showed up, the refuge could randomly allocate slots among those who showed up with second priority tickets. If any slots remained, they’d continue with third priority tickets, etc. We could focus on the total price of all refuge priority level tickets for a date, as that should vary less with variations in the chance folks can’t show up to use tickets.

I’m not sure how best to correct for variations in the local supply of refuge or resort slots. I’m also not sure how best to aggregate trades and prices across diverse resort-refuge pairs.

Added 10p: Regarding the risk that refuge administrators might not honor valid tickets, to get useful prices we only need a substantial chance that tickets will be honored. In order to distort our disaster indicator policy advice, ticket speculators need to expect that the chance of valid tickets not being honored is substantially correlated with chosen disaster policy.  What policies could plausibly create such an expected correlation?

Added 12Dec: I should add that as futures markets in concrete physical services, refuge and resort futures and their derivatives would seem to avoid anti-gambling laws.

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  • dWj

    As the possibility of futures markets makes stark, even in situations in which we don’t like to assign probabilities to events — indeed, even in situations where we might make better decisions through some sort of qualitative analysis — there will either be some underlying “risk-neutral” probability system that is consistent with our decisions, or else a way to make an unambiguous improvement. The creation of the futures market would reveal at least one set of such consistent underlying probabilities, or highlight the existence of an “arbitrage”; whether your numerical estimates are way off or not, pretending not to have them doesn’t mean they aren’t implicit in your decisions, and if they aren’t implicit in your decisions, you’re doing something wrong.

  • RobertB

    Seems like there’s too much political risk for these futures to give you a reliable price. You’re really paying for the opportunity to assert that the future you bought 5 years ago entitles you to a spot in a refuge ahead of some pregnant woman. Good luck with that one…

  • Robert Koslover

    I’m going to go out on a limb here and assert bluntly that this simply won’t work. Consider that the kind of people who are truly interested in refuges also tend not to be the kind of people who would trust large organizations and/or governments to manage or run them. And frankly, I sympathize with their viewpoint. After all, your apparent assumption that law and order, including contract law (!), would prevail in times of *extreme* societal distress/disorder is, in my view, flawed, to say the least. Consider, for example, that contract law was already blatantly overruled in the process of the GM bailout, which was not by any remote reasoning a TEOTWAWKI (“the end of the world as we know it.”) situation. And really, who is so naive to believe that his or her “ticket” to a lifesaving refuge would actually be honored, while the (presumably-government administrators/policemen) at the doors to the refuge would stalwartly block their own families and friends from entering instead, all to preserve your contracted space for you? And who would trust these same people (and their likely-unionized employees) from occasionally (or more often) looting these refuges of their valuable foods, medicines, flashlights, etc, in advance? OK? A better solution: Private, small-group, out-of-the-way refuges, built, operated, guarded, and maintained entirely by the people who pay for them, who know/trust each other well, and who intend to use the facilities personally if/when they need them. This may seem boring and non-grandiose, but it is also workable, since some of it is already happening. And if you want to see more of it, then maybe you could offer people a tax break or some free land or something. (But then, don’t count on them actually taking the tax break if it requires them to reveal where their refuge is, or let the government inspect it, etc. See what I mean?)

    • I did not propose that “large organizations and/or governments” run these refuges or markets.

  • What are the odds that four years will be enough time, even assuming that a refuge is the right strategy?

    Also, The Digwell Carol.

  • Adam

    I agree with Robert. The incremental risk that one’s “right” to entrance in the refuge would not be recognized in the event of a disaster would destroy the futures spread (and the predictive power of the scenario you propose).

  • Robert, Robert, and Adam, the company I linked to has sold a thousand refuges so far. What fraction of those refuge slots do you think are for people who personally paid for such refuges, or their close friends and family? I’d guess at least 25% of those slots are for others. Which suggests a non-negligible chance a ticket owner could use it, which is all we need to get meaningful relative prices.

  • What if there was a chance that the refuge would be sealed when no catastrophe?
    It would at least test them, and their inhabitants.

  • Sounds worthy of trying out, to me.
    I wonder if we can use “natural” data to get similar approximations (# of bomb shelters/panic rooms being built, population outflows, etc.)
    For example, what can we see from Korean data right now, wher existential risk seems to be increasing. Was there anything discernable in the period of time before the political change was obvious?

    • Jess Riedel

      This is worth investigating, of course. But the key benefit of prediction markets, as I understand it, is that you can subsidize them. The quality of the info being fed into any kind of market (whether natural, like that for bomb-shelters, or artificial, like subsidized refuges) will be limited by the resources that the participants are willing to invest into researching/calculating/theorizing. It’s likely that investigating low-probablity/high-impact events is not usually worth it for self-interested individuals, so society (through governments or charities) needs to subsidize the prediction markets to provide the proper incentives.

      • Jess R., you and I couldn’t agree more on this topic. It’s why I favor high levels of redistributive/pigovian taxes, for things like subsidized prediction markets investigating “high impact events”.

  • JLA

    I think this is implausible.

    Prediction markets for “disaster” events don’t work very well. As an extreme example, say I want to bet against the end of the world. Nobody will take that bet because nobody will be around to collect. So, prices in that prediction market would tell us nothing about the probability of the world ending.

    In this case, if I buy a refuge future, the probability that I’ll actually get to use it in the event that I need to is quite small. Prices in this market would be a poor predictor of the probability of a major disaster.

  • rapscallion

    say I want to bet against the end of the world. Nobody will take that bet because nobody will be around to collect.

    You can loan out money now on the condition that you are paid back with interest after some ostensible end-of-the-world date. This is equivalent to betting that the world will not end.

    • JLA

      The interest rate on that loan is affected by dozens of other factors and so will not give you reliable information about when the world will end.

      • rapscallion

        What I described was simply an option. Do you not think option prices give information about underlying assets?

  • JLA

    Inferring the probability of the world ending from your option price is not nearly as simple as you make it out to be. The underlying asset of your option is *not* the world ending, but rather the world ending plus a lot of other stuff. Maybe you can account for some of the other stuff, but if you don’t have a complete asset structure (and you almost surely do not), then you’re going to have a biased estimate of the probability of the world ending.