Pentagon market plan was a natural
Financial Post: Editorial
Paul Kedrosky
Financial Post

02 August 2003
National Post
National
FP11

The U.S. can't make up its mind about markets. Despite markets' remarkable 
power, even the most capitalist country in the world remains ambivalent 
about their use.

First, there was the killing of the Hussein brothers. Say what you will 
about U.S. policy in Iraq, there can be no doubt it was bounty-hunting 
economics that brought in Uday and Qsay. The U.S. offered US$15-million per 
Hussein brother, and where intelligence services failed, self-interest 
worked. Someone is Iraq is now $30-million richer because they felt 
$30-million was worth the inherent risk of turning in Uday and Qsay.

I feel your squeamishness. After all, you protest, we're talking about 
putting a value on human lives here. How crass is that?

It may be crass, but we do it all the time. Many fields, from insurance to 
pensions to automotive manufacture, put a value on human life, sometimes 
explicitly, but often implicitly. The personal insurance industry couldn't 
function properly without putting a value on your life -- how else would we 
know what payout to give, and what payments to demand?

Admittedly, the Husseins are a special case. No one (so far) is suggesting a 
return to the bounty-hunting days of Butch and Sundance, with posters on 
street corners offering rewards for every ne'er-do-well, or Ebay auctions 
for criminals. It is worth remembering, however, that television shows 
offering rewards for tips on crimes have been remarkably successful, 
demonstrating that such "crass" self-interest works.

Despite this success, however, it still takes nothing to spook people away 
from relying on markets. Earlier this week we had a counter example, with 
U.S. politicians canceling a Pentagon project that would have created 
markets in, among other things, the probability of terrorist activities. The 
Policy Analysis Market was to create tradable options in the likelihood of, 
for example, Palestinian President Yasser Arafat being assassinated, or 
Jordanian King Abdullah being overthrown.

Critics were apoplectic. Senator Hillary Clinton called it "a market in 
death." Others called the project a grotesque waste of money. How so? After 
all, such markets exist already, with a company called Tradesports ( 
www.tradesports.com) offering working markets in, for example, the 
likelihood of weapons of mass destruction being found in Iraq (it's 
falling). Having the Pentagon do something similar, albeit on a much larger 
scale, is unlikely to turn into some sort of technological white elephant.

Most, like Senator Clinton, were more upset at the principle of the thing.

How can we be so crass as to allow people to bet on untoward events, like 
assassinations? But we do that every day in providing and purchasing 
insurance, in buying cars, providing medical treatments, and in building 
highways.

Why do we persist in attaching values to unwelcome events if we're so 
squeamish about it? Partly because it happens anyway, but mostly because it 
works. You can rest assured that with or without a Policy Analysis Market 
there are people inside of everything from the Pentagon to think-tanks, to 
large mutual and hedge funds who are attaching probabilities to 
macroeconomic and political events. They would be crazy not to. Making the 
probabilities explicit would only make those markets more efficient -- they 
would, after all, inevitably reflect much more private information.

Some critics were offended at the money-making angle. But the bets would 
have been very small, on the order of $500 or so, not enough to allow any 
terrorist to make their activities self-financing. If any terrorist really 
wanted to make major coin from an attack, they would be smarter to simply 
buy put options in the exchange of their choice. That would be simpler and 
much more profitable than messing about in the Pentagon's defunct Policy 
Analysis Market.

No, it seems clear that two things did in this fascinating and useful 
application of markets. First, there was people's misplaced squeamishness 
about the role of economics in their lives. While we accept that likelihoods 
and values get attached to lives and the like, it seems clear we childishly 
don't want people to tell us about those values.

Second, there was the John Poindexter problem. A retired navy admiral and 
Reagan's national security advisor, Mr. Poindexter was convicted of 
conspiracy, lying to Congress and the like over the Iran-Contra scandal. He 
landed on his feet, and until recently ran the Information Awareness Office 
at the Pentagon, the group that was backing the proposed new terrorist 
market. He is not, to put it bluntly, trusted in matters of intelligence, 
with a reputation for being overly fond of deep-spook behavior. It made him, 
and this project, easy targets -- and he has belatedly announced he is 
resigning.

Poindexter aside, far from being ghoulish or a waste, the Policy Analysis 
Market was a clever idea. It demonstrated, however, that there are limits to 
the uses to which people want markets put. Given, however, that our own 
actions every day belie that high-mindedness, the cancellation of 
Poindexter's market is rank personal and political cynicism.

It is something that even politically tone-deaf Mr. Poindexter would finally 
understand.

Business; Opinion