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Poindexter was thinking out of the box - Pandora's box
By Richard Siklos (Filed: 03/08/2003)
In the wake of last week's furore over a nascent online "terror futures" market backed by the Pentagon, there was a clever bit of financial footwork by tradesports.com, a Dublin-based outfit that takes punts on the outcome of everything from sports matches to court cases. It unveiled a new product: contracts on the likelihood that the retired admiral John Poindexter - who championed the terror futures project - would remain on the Pentagon's payroll by the end of this month. Sadly, there was barely time to make much of a market as news of his departure broke the very next day. Poindexter is the former adviser to Ronald Reagan who was convicted of lying to Congress about the illegal IranContra arms deals but whose conviction was overturned on a technicality. He found a new home in the Bush Jr administration working for Darpa, the Defence Advanced Research Projects Agency, which has championed some unorthodox but brilliant successes over five decades, such as the framework for the internet and stealth technology for military jets. This latest example of "thinking outside the box", however, was cancelled before it went live on October 1. Called the Policy Analysis Market, or Pam, it was essentially an online betting site not terribly unlike tradesports, except participants could punt on the likelihood of attacks, assassinations and other examples of geopolitical mayhem. With backing from Darpa, Pam was created by a group of academics and a San Diego company called Net Exchange in conjunction with the Economist Intelligence Unit, the research arm of The Economist. But it aroused deafening indignation when the media got wind of it on a slow summer news day . "Sick" and "grotesque" were among the reactions of senators who rallied to nix the project, gaining the instant support of Paul Wolfowitz, the deputy defence secretary. Apart from being a little creepy on the surface, the other obvious problem with Pam was the notion that, if such a market were to flourish, terrorists could actually end up making money out of placing self-fulfilling bets. After all, there were investigations into bin Laden or associates short-selling airline stocks before September 11 2001 through overseas accounts, although nothing appears to have come of them. I asked Professor Robin Hanson of George Mason University, who first proposed the idea of Pam to Darpa, how he and his fellow prediction gurus failed to forecast the backlash. "This was one of the possibilities we anticipated," Hanson replied, without a trace of irony. "We didn't put a high probability on it." In a theoretical sense, Pam had some undeniable pluses. There is evidence that such speculative markets do a better job of forecasting trends than individual experts or traditional polling in everything from commodity prices to election results to the box office openings of Hollywood blockbusters. If you are an efficient market fiend, the idea of a mechanism to widen the flow of information for intelligence gathering is appealing. A Stanford University study on the performance of "Saddam securities" offered by tradesports before his overthrow found that movement in futures based on the date of his regime's end closely mimicked that of the spot oil price. In a way, the government's stewardship may have been Pam's biggest drawback. Here's why. Let's posit there was a sudden surge in trades anticipating a terrorist attack in, say, Belize. If based on this trend, the CIA was able to thwart the attack, then the securities would fall and there would be no reward for anticipating events. However, my wager is that Pam will exist in some form or another before long, backed by some intrepid (and undoubtedly offshore) entrepreneur. Though the US government will no longer foot the entire bill, it will continue to pay for info the old-fashioned way, such as the $30 million (£19 million) jackpot going to the person who gave up Qusay and Uday Hussein. What the moral indignation about Pam ignored is the reality that Wall Street has always had a rather strong morbidity streak, and this may actually have been a way to put it to worthy use. Massive financial interests bet daily on stocks and futures relating to trends in mortality, destruction and unrest through the insurance industry. How do you think Warren Buffett made many of his bazillions? (Answer: it's not just the quaint furniture shop in Nebraska.) And, besides, hasn't much of the stock market's performance over the past two years basically been one mega-wager on the odds of more terrorist attacks and their potential damage to the psyche and economy of America? • Email: midtownview@aol.com
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