The political furore that led to the resignation of Admiral John M. Poindexter and forced Pentagon to abandon launching an online futures trading market in which anonymous speculators would bet on possible terrorist events should not eclipse what was an attempt to understand terrorism by synergising profit motives of financial markets with innovative management practices and advanced technologies.
The Pentagon developed Policy Analysis Market (PAM) as ‘‘part of our search for new ways to prevent terrorist attacks ... Futures trading has proven effective in predicting events as diverse as oil prices, elections and ticket sales’’.
According to its websites http://www.darpa.mil/iao/FutureMap.htm and http://www.policyanalysismarket.org, PAM would ‘‘trade on economic, civil and military futures of Egypt, Jordan, Iran, Iraq, Israel, Saudi Arabia, Syria and Turkey and the impact of US involvement with each ... The creators of the market envision other trappings of existing markets like derivatives’’. What got PAM into trouble were the events it was taking bets on — assassinations of Yasser Arafat and King Abdullah II of Jordan, a biological attack on Israel, a nuclear missile strike by North Korea, and so on.
PAM was an initiative of Admiral Poindexter, national security adviser during Ronald Reagan’s presidency. He was appointed head of Pentagon’s Terrorism Information Awareness programme after 9/11. It was to be launched on August 1, 2003. PAM was a joint programme of US Defense Advanced Research Projects Agency (DARPA) and two private companies — Net Exchange, a San Diego-based market technologies company, and Economist Intelligence Unit. Registered traders would deposit money into an account and buy and sell futures contracts on assassinations and coups in West Asia. Holders of a futures contract that came true would collect the proceeds of investors who predicted wrongly.
PAM’s websites gave some blood-curdling examples. Suppose a trader believes that Jordan’s King Abdullah will be assassinated within the year. Since she holds a minority opinion, she can buy a futures contract on Abdullah being killed at a low price, say five cents. As more people follow her example, the price of the killed-king future goes up, to say 35 cents. The payout if the king is killed within the year is a dollar, otherwise nothing.
If the king is killed, the early investor makes a profit of 95 cents. The later investors make a profit of 65 cents. Yasser Arafat is more likely to be assassinated than Abdullah. You may buy a futures contract on this, at say 55 cents. As more people begin to think like you, the cost of Arafat contract would go up, to say 85 cents. The payout if he is killed is a dollar, else nothing.
So you could make a profit of 45 cents and others who followed you could make 15 cents if Arafat is killed.
On July 18, 2003, two Democratic senators, Byron Dorgan of North Dakota and Ron Wyden of Oregon, denounced PAM as ‘‘grotesque’’ and ‘‘morally repugnant’’. They added, ‘‘This encourages terrorists to participate, either to profit from their activities or to bet against them to mislead US authorities.’’ Next Deputy Defense Secretary Paul Wolfowitz terminated PAM and its websites were deleted. Poindexter resigned after Senator Barbara Boxer, Democrat from California, demanded Congress ‘‘end the careers of whoever thought this up.’’
Several experts criticised the termination of PAM. James Surowiecki, financial columnist of New Yorker magazine and MSN’s slate.com opined America would regret this: ‘‘Similar markets have proven surprisingly good at predicting elections and box-office sales. Orange-juice futures do a better job of predicting the weather in Florida than weather forecasts do ... It doesn’t matter much what markets are being used to predict. Whether the outcome depends on irrational actors (box-office results), animal behaviour (horse races), a blend of irrational and rational motives (elections), or a seemingly random interaction between weather and soil (orange-juice crops), market predictions often outperform those of even the best-informed expert.’’
The contention that betting on assassinations is morally wrong is specious since existing currency, stock and commodity markets implicitly factor in such political risks. Also, in a life insurance policy, the policy issuer is betting that you will die later than you think you will, while for an annuity, the issuer is betting that you will die sooner than you think you will.
It is also specious of Wolfowitz to terminate PAM on the moral grounds that it was betting on assassinations when the Pentagon has frequently simulated the death of Indian leaders in Pakistani-sponsored terrorist attacks. A wargame recently conducted by the US’ Naval War College began with the following scenario: ‘‘The defeat of a new resolution in the UN Security Council calling for international involvement to resolve the status of Kashmir precipitated violent anti-Western and anti-India demonstrations in Pakistan. This was accompanied by a sharp increase in Islamic guerrilla activity in Kashmir, culminating in the downing, by a shoulder-fired surface-to-air missile, of an Indian aircraft carrying India’s home minister, defence minister, and army chief ...
“India responded by launching Operation Resolute Sword, air and artillery attacks against targets in Kashmir and northern Pakistan .’’
India could easily set up an exchange similar to PAM, combining the desi genius of Dalal Street brokers with cricket match bettors and IITian mathematical modellers and geopolitical and defence pundits. It would would not be expensive. DARPA spent only $ 600,000 to develop the PAM software and budgeted $ 8 million as operational costs for two years.
The benefits to India of getting Dalal Street to perform undha badla on Mohammed Azhar or Dawood Ibrahim would greatly outweigh such low investments.
(The author heads a group on C4ISRT (Command, Control, Communications & Computers Intelligence, Surveillance, Reconnaissance, and Targeting) in South Asia.)
