In Defense of Terrorist Futures

This is interesting. . .

Another Intelligence Failure
By Alexander Tabarrok and Robin Hanson*


In light of the massive failures of U.S. intelligence agencies to avert the events of 9/11, one would believe politicians would be eager to try new and better institutions. Yet, when one such innovative endeavor was recently proposed – the Policy Analysis Market (PAM) – Senators Ron Wyden (D-OR) and Byron Dorgan (D-ND) characterized the idea a “terror market” and before the idea could be rationally debated – let alone tested – the program was terminated.

The ideas behind policy markets are simple and powerful. Markets are well-known aggregators and communicators of information dispersed among multiple individuals. Businesses, economists and the public have long looked to markets to help divine the future. Airlines look to the futures price of oil to intuit the effect of the war in Iraq on oil supplies, Wall Street watches interest rates to help predict future actions by the Federal Reserve, one economist has even used orange juice futures to help predict the weather in Florida.

Most markets are primarily for trade with information as a byproduct. But in recent years markets have been created specifically for the express purpose of ferreting out and gathering information.

The best known of these “information” or “prediction markets” is the on-going Iowa Political Stock Market. The Iowa market lets traders use real money to buy and sell “shares” of political candidates. A share in George W. Bush, for example, pays $1 if President Bush wins the next election and nothing otherwise. If the market price for a Bush share is 75 cents, this suggests that market participants think President Bush has a 75 percent chance of winning the next election.

More http://www.independent.org/tii/news/030804Tabarrok.html

there is no reason to think any of this works, it's just what happens when the extreme right has to solve a problem because they only have one solution: capitalism.

Kind of startling to see a subject line like that? Does it seem like that would be something they wouldn't allow?

How about these:

Can we bet on whether over a dozen Marines get killed next week?
Can we bet on whether someone crashes a jet plane into the Capitol?
Can we bet on whether someone kills the Bush Twins in retaliation for Uday and Qusay?

Does it seem barbaric to wonder about these questions?
If so, why doesn't it seem barbaric to bet on them?

It's not interesting. Every supportive example used is based upon issues of specific economic or financial interest based upon market actions. These specific interest are not tangentially related to market activity, but are direct causes or effects of the economy and/or markets.

This policy analysis market had no such direct cause/effect relationship to the activities in was purported to predict. Even the writer's Nobel winner reference is meaningless, since none of that good professor's work is based upon such tangential use of data for prediction. It was name dropping, pure and simple.

Lastly, the use of the Iowa Market is patently stupid. The track record of that market is not long enough extant to determine the validity of the predictions. A 75 cent share means that 75% of people think Bush will be reelected? What if all those people are wild-eyed speculators, or just plain uninformed? The Iowa Politics Market gambling, not investing. It's not based upon information as much as gut feeling, and wishful thinking.

So, this article is just rambling nonsense in support of a failed idea. The criticisms were all 100% correct.
The Professor

I just think that it's interesting that people are defending this. The Free Market fanatics in other words.

I wasn't intending for my comments to be directed at you. My comments were directed to the column author.

You said it was interesting. I found the column very uninteresting and poorly written.

The only thing we disagree about is the "interestingness" of the column. I think we agree on the premise.

You say interesting; i say ridiculous. No big disagreement, there, really.
The Professor

EXACTLY what they are. Only their "Stalin" is the Imperial Family of Bush.

And they don't yet feel comfortable using violence yet.

YET.

the defense would be that the players in the Terrorism Futures market would be hand picked to avoid noise traders of the sort that plague the Iowa market, but that creates it's own problems since these people would likely have inside knowledge of US policy that could affect these predictions you still wind up with self-fulfilling prophesy.

. . .to defeat that "safeguard" was that the intention was not really to speculate on terror activites, but to attract "insiders" who would "bet" money on something happening when they knew something was going to happen.

So, hand-picking the players would completely negate the purpose of the market in the first place. We would have to handpick terrorists with inside information, and if we knew who they were, we could get information without this silly market scheme.

The only way to cut back on noise, is to select people who don't know anything, and keep out the ones that do. I don't think felon Poindexter and his minions thought this through, fully.
The Professor

Businesses, economists and the public have long looked to markets to help divine the future. Airlines look to the futures price of oil to intuit the effect of the war in Iraq on oil supplies, Wall Street watches interest rates to help predict future actions by the Federal Reserve, one economist has even used orange juice futures to help predict the weather in Florida.

The difference is, these are all LEGAL activities. Why should someone be allowed to cash in on terrorism in ANY way? More important, how long before the terrorists themselves start "insider trading" and FORCING predictions to come true?

rocknation

Businesses, economists and the public have long looked to markets to help divine the future.

So now free markets are some kind of mystical incantation designed to bring up omniscient spirits and foretell the future?

New meaning to "voodoo economics"

Either this is meant to be a honeypot (a way to catch stupid and greedy terrorist associates) or a revision of the Delphi method.

Delphi method is well respected, but it involves a closed community of experts reaching consensus. I can't imagine how opening it up to the world would improve the quality of information - how could you avoid having your market "freeped" by folks with an ax to grind (imagine some country manipulating the market - e.g. CA electricity market 2 yrs ago)

A honeypot seems quite idiotic - aren't there more effective ways of catching terrorists? Seems kind of like those heartfelt Nigerian emails I keep getting, someone would have to be very foolish to think they could really make money betting on terrorists.

The Iowa Political Stock Market doesn't reflect a candidate's real chances, only what the market thinks the market thinks. As in any other stock market, investors base their predictions on their opinion of what other investors are likely to do. Election Day is equivalent to delivery day in the commodities market. The fluctuation between the beginning of trading and the delivery of the product doesn't correspond to any intrinsic "truth".

The Bandwagon Effect makes traders bullish on a candidate's chances, and even influences elections. However, there's a gap between the theory of information markets and their actual performance.

http://www.latimes.com/news/opinion/commentary/la-oe-stiglitz31jul31,1,4162448.story?coll=la-news-comment-opinions

Terrorism: There's No Futures in It
Administration has taken market fundamentalism to an absurd low.

By Joseph E. Stiglitz, Joseph E. Stiglitz, an economics professor at Columbia University, was chairman of the Council of Economic Advisors under President Clinton. He was awarded the Nobel Prize in economics in 2001.


The Bush administration's naive belief in free-market economics reached a new level of absurdity this week with the proposal to create a futures market in terrorism. The argument behind the proposal was simple: Information is valuable, and information about a possible terrorist attack is particularly valuable.

One of the often-lauded virtues of futures markets is their ability to bring together disparate economic information and add it up together (or "aggregate it," as economists say).
---------snip

But there are severe limitations in the ability of markets to provide accurate predictions; for instance, where markets have few participants and can be easily manipulated, or where there are large asymmetries of information, with some participants (the few large international chocolate producers, for example, in the cocoa futures market) having far more information than others.

--------snip
Of course, no one expected DARPA's John M. Poindexter — notorious for his eventually overturned conviction for lying to Congress about Irangate — to approach the problem from the perspective of economic theory. But what was he thinking? Did he believe there is widespread information about terrorist activity not currently being either captured or appropriately analyzed by the "experts" in the FBI and the CIA? Did he believe that the 1,000 people "selected" for the new futures program would have this information? If so, shouldn't these people be investigated rather than rewarded?

--------Read the Whole Article!!!!!

Former chief economist for the World Bank, he's foregone the laissez faire koolaid and is one of the World Bank / WTO's harshest critics. The kind of credibility that comes with having been an insider is priceless, we're lucky to have him.

Notice in one of the final paragraphs he calls the administration "the Bushies?" He can hardly hide his disdain for this crew.

PAM was to harness the “anonymous forces of market capitalism” to predict the likelihood of acts of terrorism - much as commodity-trading speculates on the future price of coffee or pork bellies.

AMERICA IS NOT A PHUCKING COMPANY It raises moral, as well as tactical concerns, in pointing out the obvious. Not only were markets faulty predictors of the future (witness the last stock market bubble and its collapse), but if anonymous online traders could bet on the probability of various acts of terrorism in the Middle East - assassinations and coups - the setup was an invitation to mischief, including insider-trading by terrorists themselves.

“Can you imagine,” asked Senator Byron Dorgan of North Dakota, who helped blow the whistle in the Senate, “if another country set up a betting parlor so that people could go in - and is sponsored by the government itself - people could go in and bet on the assassination of an American political figure?”

The new toy was the latest brainstorm from its Defense Advanced Research Project Agency, DARPA, created to spearhead the War on Terrorism, and headed by the notorious John M. Poindexter. DARPA was trumpeted by Paul Wolfowitz, Deputy Secretary of Defense, as “brilliantly imaginative.”

The idea was anything but brilliant, of course. It was, as one Congressman put it, “unbelievably stupid.” A New York Times editorial called it “wacky,” and demanded Poindexter’s resignation, without asking how the idea had gotten past Wolfowitz. In response to the bipartisan outrage, Wolfowitz lost no time distancing himself from the project, suggesting that the brainstormers at DARPA “got too imaginative.”

A New York Times editorial called it “wacky,” and demanded Poindexter’s resignation without asking how the idea had gotten past Wolfowitz.

Good point--this never would have seen the light of day unless the Bush White House upper management had approved it. The Times should have asked this question instead of going along with the illusion that Poindexter created and publicized this idea independently.

rocknation

(ducks)

Seriously. If the argument can be made that individual instinct is composed of thousands of subconscious analyses of low-level information, why not a group setting? If thousands of people have a "gut" feeling about something, the trend should be increasingly accurate as more people weigh in.

The problem was, IMO, implementation. The sampling would have to be huge, and a wider cross-section than just those who are interested in betting (or who had the disposable income to do so).

Basically a good idea, done poorly. (or, "define a government program"...)

(Edited to add): In honor of my 966th post, visit my page on the Crash of SR-71 #966)

I mean, he was offering money to terrorists' families if the terrorist blew him/herself up, right?

Of course, this isn't the main thrust of the assault, just one of the hindsight reasons used after WMDs weren't to be found.

Aside from the fact that the idea is morally reprehensible, doesn't it fail to provide an incentive for investing? If the idea is to ultimately gather information about, say, a possible terrorist attack, once we gathered that info wouldn't we then use it to PREVENT the attack? And once we've prevented it it would seem that no one would cash in because the very thing they were betting on happening didn't ultimately happen. Also, does anyone else think that this "investing" idea could have created a diplomatic nightmare. Imagine Hamid Kharzai or Pervez Musharaf or Kim Jong Il discovering that people were "betting" on them being assassinated. Haven't we alienated enough of the world? Some of you seem to have a more sophisticated understanding of this whole thing but these are just some of my thoughts.

He has made a career out of knowing how the market works, and is always voting Republican, so I asked him about this. He said that although the "efficient market" theory does have some validity, the "terrorism futures" thing is ridiculous; a) "it's not going to predict the next 9/11" and b) "even if it did, it's so insensitive I can't believe they tried it."

My partner thinks this was really just a crooked moneymaking scam, in which the defense department would engage in insider trading in order to generate cash for their covert operations.

Personally, I think it is proof that we have become a theocracy--with the ruling religion being not Christianity, but capitalism. I mean really. This is magical thinking. They're using the market to do divination. It's like reading entrails. Too bad they're OUR entrails.

C ya,

The Plaid Adder

:kick: