CFO Magazine (Monthly)  
September 01, 2003
­Joseph McCafferty


Ticker Tales

When word leaked out in late July that the Pentagon was working on a plan to 
create a futures market on the likelihood of such events as a terrorist 
attack, criticism was so harsh the plan was scrapped the next day.

The idea was that trading in futures based on political events could help 
predict and thus prevent them. And while terrorism futures might be a 
terrible idea, Hal Varian, a business professor at the University of 
California-Berkeley, insists the underlying concept is not as nutty as it 
sounds. "Markets do an awfully good job of forecasting many events and 
trends," he says. 

Markets can aggregate many small pieces of information into a bigger 
picture. For example, orange-juice futures accurately predict cold weather 
in Florida, says Varian. And the Iowa Electronic Markets have been 
predicting political elections with great success for 15 years. "Changes in 
supply and demand move information quickly and efficiently," adds Robert 
Forsythe, co-founder of the market at the University of Iowa.

That doesn't mean predictive markets aren't susceptible to manipulation. 
Just like financial markets, they need to be regulated ­ which may be a 
reason that terrorism futures failed. How do you charge a terrorist with 
insider trading?