Posted on 07/30/2003 10:17:13 AM PDT by Pikamax
Is a Futures Market on Terror Outlandish? Maybe not. There is strong evidence that futures exchanges can predict events better than other forms of analysis. FORTUNE Wednesday, July 30, 2003 By Jeremy Kahn
The Defense Department announced yesterday that it is canceling a controversial program to develop a futures market that would allow traders to bet on wars, assassinations and terrorism in the Middle East.
The plan, which FORTUNE first reported on in its March 3rd issue (Place Your Bets—On War), was abandoned after Democratic senators assailed it as ghoulish, immoral, and absurd. Senator Minority Leader Tom Daschle of South Dakota claimed the program would provide a monetary incentive to those wishing to commit acts of terror. Senator Hilary Rodham Clinton (D-N.Y.) said the plan would have created "a futures market in death."
While the Pentagon program may sound outlandish, there is strong evidence that futures exchanges can predict events better than other forms of analysis. Betting pools on election results have proven more accurate than polls, and options markets are better predictors of future stock prices than the price targets set by individual equity research analysts. The reason, economists say, is that markets are extremely efficient at aggregating information from all investors—including inside information.
It's the ability of markets to make accurate predictions and reveal otherwise hidden information that attracted the Pentagon to futures exchanges. Earlier this year, the Defense Advanced Research Projects Agency (DARPA) gave a $1 million grant to startup Net Exchange to establish a futures market for political events in the Middle East. Net Exchange was founded by a group of CalTech economists who have been leading proponents of using markets as information gathering tools. The Policy Analysis Market, which would have been run jointly by Net Exchange and The Economist Intelligence Unit, was to start registering traders this week, and was supposed to be fully operational by October 1. It would have allowed traders to place bets on events including whether Palestinian leader Yasser Arafat would be assassinated, or Jordan's King Abdullah II would be overthrown. Market participants could have remained anonymous, a fact that some senators critical of the program said raised the possibility that a terrorist could use the market to profit off his own attack.
The Pentagon had asked for an additional $8 million to fund the project next year, but yesterday Democratic Senators Byron Dorgan of North Dakota and Ron Wyden of Oregon held a press conference to attack the plan. Their criticisms were quickly echoed by other Democrats, and by the end of Tuesday, by leading Republicans as well. Deputy Defense Secretary Paul Wolfowitz, testifying before a Senate Foreign Relations hearing on Iraq, said the futures exchange program would be terminated immediately. Robin Hanson, professor of economics at George Mason University, and affiliated with Net Exchange, says he's disappointed the Pentagon has decided to eliminate funding for the futures market. He says criticism that terrorists could have profited from the market are overblown, since the architects of the exchange were not planning on allowing any wagers greater than about $100.
The Policy Analysis Market was part of a larger Pentagon project called FutureMap (an acronym that stands for Futures Markets Applied to Prediction) that is run out of DARPA's Office of Terrorism Information Awareness. (This department was previously called the Office of Total Information Awareness but the Pentagon decided that that just sounded too Orwellian). The office is run by John Poindexter, who served as former President Reagan's national security advisor, and was a key figure in the Iran-Contra scandal. Earlier this year, Poindexter was forced to abandon a controversial plan to use the Internet to spy on average citizens in an attempt to prevent terrorist attacks after civil rights groups and federal legislators objected.
While betting on assassinations or the probability of terrorism may sound morbid, these kinds of betting pools have actually been in existence for centuries. In the Middle Ages, European nobles often bet on the outcome of wars. More recently Internet "ghoul pools" have become popular. Generally, these sites allow people to bet on the day an elderly celebrity will die. At least one of these allows users to bet on the month and year India and Pakistan will have a nuclear exchange. And several sites allowed people to wager on when a war with Iraq would start. One of these sites, Tradesports.com, was extremely prescient in predicting the date Saddam Hussein would be removed from power. In fact, the idea of using futures exchanges to predict political events is so intriguing that it may surface again in another form. But for now, the Defense Department's Policy Analysis Market is defunct, and the hottest wager over at the Pentagon may be whether John Poindexter still has his job in a week.
I guess she's never heard of Life Insurance. Given her own acumen in the cattle futures market I would have assumed she'd be supportive of the effort...
The concept, however, is sound. If the press would do less clucking about how unorthodox it is and more research into its possible effectiveness, the public could be swayed. I'm sure that won't happen, of course. It would be too much fun for the lazy media to attack a "risky gambling scheme with American lives".
A current problem in the scientific community is that (pseudo)scientists and their supporters can make reckless statements without incurring any cost upon themselves if they are wrong. Science betting addresses this problem. People won't be inclined to shoot their mouths off on issues like global warming or cold fusion if they have to put their money where their mouths are.
One difference, though, between science betting and terror betting is that one of the purposes of science betting is to motivate funding to prove a scientific point and "make it happen". This is not necessarily desirable in the case of terror betting.
Actually, it was from George Mason University.
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