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TRADERS COULD BET, for example, on the prospects for Jordan’s economy, the next suicide bombing in Israel or the assassination of Yasir Arafat. Then word got out. Sen. Byron Dorgan called the idea “unbelievably stupid” and “offensive.” The New York Times called it “ridiculous” to think markets can predict the future. It didn’t help that one key man behind the trial was retired Adm. John Poindexter, who last hit headlines in association with the Total Information Awareness program, an Orwellian-sounding plan to link all computer databases in a hunt for terror suspects. The day after Dorgan and Senate ally Ron Wyden publicly exposed the terror-futures market, the Pentagon killed it, and by the end of the week Poindexter had resigned from DARPA.
It’s a wonder that Poindexter, who beat a charge of lying to Congress in the Iran-contra scandal, ever got a critical job in the war on terror. Still, he was on to something. Farfetched as terror futures sound, DARPA argued that markets have proven surprisingly “effective and timely aggregators of dispersed and even hidden information.” That’s the only kind of information available on terrorist plans, and the latest evidence on 9/11 shows that it just might have been prevented if U.S. intelligence had been quicker to act on scattered and hidden clues. “There is some amazing evidence to support markets as a predictor of future events,” says Vernon Smith, the 2002 Nobel Prize winner in economics, adding that it is “ridiculous” to dismiss ideas like the terror-futures market out of hand.
Academic studies, for instance, show that orange-juice futures are often a more accurate indicator of weather than meteorologists. Game sites like the Hollywood Stock Exchange have a good track record in picking Oscar winners. Since 1988, the Iowa Election Markets (IEM), conducted by the University of Iowa, has consistently bested pollsters when it comes to predicting presidential-election results. Its record piqued Pentagon interest and was one inspiration for studying terror futures.
Why do markets work as crystal balls? It’s not entirely clear, but part of the reason may be their impartiality. They tend to allow the best information to rise to the top and to override the bully factor, which is huge in the intelligence community. In any sector some voices will be forceful, others intimidated, “and all of that will influence the opinions that are shared,” says Prof. Thomas Rietz, one of the directors of the IEM. “It’s a leap from elections to geopolitical risk, but you could see why someone would make that leap.”
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What We Should Do Now
