What are the odds this idea will win? 12 September 2003 Lloyd's List The plan to develop a market in `terror futures' was ill-timed and poorly managed. It's a shame because, in theory, the idea works, writes Neville Smith GIVEN the delicacy of the date, it would be foolish and insensitive of me to suggest that the US has learned little since September 11, 2001. Clearly it has, and plenty of what it has learned concerns intelligence and the importance of information in areas you know little about. Intelligence it was, too, behind the doomed attempt to bring a `terror futures' market to the US, apparently inviting the public to speculate on the likelihood of future terrorist attacks. On the page, this sounds like the sort of idea made for lazy journalists on a slow afternoon with phonebooks stacked full of politicians' phone numbers. And so it proved. A public relations disaster on a scale rarely glimpsed ensued, burying the idea and its creators Net Exchange under a tidal wave of opprobrium. The plan was shelved within 24 hours of launch. A large part of the problem was personified in John Poindexter, head of the Terrorism Information Awareness Office at the Defence Advanced Research Projects Agency. A former national security adviser indicted for his role in the Iran-Contra arms scandal, the hugely unpopular Rear Admiral made the most tempting target when Democratic senators Byron Dorgan and Ron Wyden stood up to denounce the project. Poindexter subsequently fell on his sword but what did these strange math geeks really want to do and why should Darpa consider letting them do it at all? To say that the Policy Analysis Market project was misunderstood is an understatement. To begin with, the idea that the general public (presumably terrorists included) could simply log on and bet ghoulishly had already been dropped. The market would have been a closed loop of invited experts from government, academia and industry. Wagers weren't really the point either N the maximum trade would have been $100. Trades would change the consensus, resulting in an evolving collective forecast which could model millions of possible scenarios. The Pentagon would have lost money on average, but hardly in the order of the millions funding global terrorism. But what basis did the plan have in reality? Surely this belongs in the bottom drawer along with tradeable CO2 emission permits and self-parking cars? In fact, if those who screamed so loudly had read to the end of the press release, they would have found some surprising successes. The Iowa Electronic Markets, for example, has forecast the outcomes of the last four US presidential elections better than the polls. Orange juice futures have been a more accurate barometer of Florida weather than conventional forecasts for many years. Perhaps most famously, Hewlett-Packard established an internal market that allowed salesmen to speculate on monthly sales during their lunch hour. Though thin and illiquid, the market's results were in every case more accurate than HPOs official internal sales forecasts. The Policy Analysis Market even pre-dates September 11, as proposals were first put out by Darpa in May 2001. The idea took root because economists like to assign values to things and in the hermetic world of USlife the idea of generating simple contracts based on country risk seemed reasonable. There are problems of course, not least that markets do get things wrong, throwing up anomalies and creating bubbles. But Net Exchange reckoned that markets are still better at sifting information than governments or corporations and thinks that information markets could still have a role to play, though with a lower profile. For evidence of the theory, the shipping market need perhaps look no further than the spectacular growth of Forward Freight Agreements. FFAs were at first considered a fad, only to take hold in dry cargo and subsequently tanker markets, allowing shipping and cargo interests to both hedge risk and speculate. That information is king is confirmed by the number of players who want greater transparency of data without necessarily trading themselves. Given the perspective of a two-year anniversary on September 11, who wouldn't want to see a glimpse of the future? And as if to prove that the US has no peer in the bathos department, an online terror futures site, terrorbet.com, is set to go live in December.