The Pentagon's Terrorism Futures Market
Steven Pearlstein
Washington Post business and economy columnist
Wednesday, July 30, 2003; 11:00 AM
This week it was reported that a Pentagon research agency was planning to create an online futures market to help intelligence analysts better predict terrorist acts. In his column today, The Post's Steven Pearlstein wrote: "The plan is ... the latest and loopiest manifestation of a near-religious belief within the Bush administration in the power of markets to solve all problems -- or at least those that can't be cured by tax cuts." (Read the column).
According to today's Washington Post, the so-called Policy Analysis Market "had been viewed by its Pentagon sponsors as a way of using the predictive ability of markets to anticipate terrorist events or other crises. It was based on the notion that futures trading has proven effective in predicting other events such as oil prices, elections and movie ticket sales." (Read related story).
Steven Pearlstein was online on Wednesday, July 30 at 11 ET to talk about the appropriateness of using markets to predict terrorism.
About Pearlstein
Steven Pearlstein writes about business and the economy for The Washington Post. His columns on the economy appear every Wednesday and Friday.
Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.
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Birmingham, MI:
I want to place a bet on when we will find the weapons of mass destruction. I'll take "never" for $1,000 and hedge it with Syria going nuclear by 3rd quarter, 2004.
Steven Pearlstein: That good.
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Raleigh, N.C.:
Do you think the whole idea behind Future Markets is flawed? The scandals surrounding how public stock companies were (and in many cases still are) being run following the bursting of the Internet-Stock-Bubble seem to support the idea that stock speculation is something that can not work and actually harms things. Should we not just stick to Public Stock Companies issuing dividends based on the money they make and restrict the price of their stock accordingly?
Steven Pearlstein: Not sure I'd go that far. Stock markets work pretty well by this point, especially if the information reaching the market from companies is reliable. Sure, there will be bubbles and busts that defy the theoretical construct set out by the efficient market theorists. But by and large it is the best way to allocate capital that anyone has come up with, which is its most important purpose.
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Dayton, Ohio:
Hypothetically speaking in terms of this Terror futures market, could the infamous "uranium claim" have been bet on? If someone invested in the likelihood that Saddam was trying to purchase uranium and aluminum tubes and this information was bogus or a hoax then the futures would go up suggesting this is a likely event when actually it was not. This market is a bad idea because no source of information can be trusted because we are also dealing with PURPOSEFUL MISINFORMATION. Federal regulations make it illegal for misinformation to be part of Wall Street trading which is why crooked CEO's are going to jail. This isn't rocket science but the Pentagon seems to be making a habit of creating rocket science out of simple concepts and solutions.
Steven Pearlstein: Fair point.
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Edgewater, Md.:
The idea of a futures market on world events is certainly not new. NewsFutures.com has operated such a thing, called the "World News eXchange", for 3 years now.
There is no doubt that markets offer a very efficient means to gather and quantify the collective consensus on important real-world outcomes. The same technology can also be put to good use for business intelligence and forecasting. However, this Pentagon flap is clearly a case of powerful technology being put into the wrong hands.
Will Poindexter survive this? The market is open on NewsFutures.com.
Emile Servan-Schreiber, Ph.D.
CEO, NewsFutures.com
Steven Pearlstein: Never heard of NewsFutures until this. Glad you wrote in.
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Columbia, Md.:
Why hasn't the possibility been considered that market manipulation was fundamentally an incentive in the Pentagon program?
Steven Pearlstein: I'm not sure it wasn't considered. There is some indication that the DARPA people knew it was a problem that needed to be worked out. But I also know from talking to Robin Hanson that some of the academics behind this project belief the market would be robust enough essentially to withstand attempts at manipulation. That's based on some simple lab experiments that I won't explain here. But I don't think we need lab experiments to know that even deep markets can be manipulated not simply from trading strategies but by manipulation of public information.
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New Rochelle, N.Y.:
Re: Betting on death. I think this is one more nail in the coffin of the Bush administration. They have seriously lost the moral ground with this scheme. Why are US taxpayers still having to pay for Poindexter's sleaze?
Steven Pearlstein: Betting on death, of course, is what the life insurance industry does, and we don't view that as morally repugnant. I'll say it here, although I'm sure it will come up later: in judging the morality of this (which I didn't in today's column), you have to weigh the moral downside of betting on death, as you call it, versus the moral upside of perhaps preventing the death of thousands of innocent people. My point was that the market would'nt work, so the tradeoff is a bad one. But theoretically, if you could construct such a market mechanism that improved the ability to predict terrorist events, say, it would be morally a bit more ambiguous than you first suggest.
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Alexandria, VA:
One area of modern life where market forces would be a welcome addition is traffic congestion. A motorist deciding whether to enter a congested road only considers his/her potential delay of a second or so, overlooking that hundreds of drivers on the road will also be delayed by a second each. This is the classic externality -- the difference between private and public cost.
The solution to closing that gap is a congestion charge. With your humorous take on DARPA's proposal, I assume you would be skeptical of congestion charges, but a blunt, primitive form of congestion toll has worked in Singapore, London, and elsewhere. We have had the technology for thirty years to eliminate toll booths and make this a smooth process.
What advice would you give to nervous American politicians to get them to dip their toes in the water and at least try some pilot projects in major metro areas? (The federal highway act -- ISTEA/NEXTEA -- has authorized funding for pilot projects since 1991.) Or move the Post off of its constant obsession with new highways and possible publish at least one editorial supporting congestion charges?
Steven Pearlstein: Actually, I wrote about congestion pricing on the Dulles Toll Road extension about ten years ago, and the article is now included in the largest selling economics textbook. I'm all for it.
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Prescott, Arizona:
This smells like an idea from the era of Craig Fields (DARPA czar fired circa 1990, ex-Defense Science Board chair). Was this imaginative idea well enough tested before such crass public trial? Who reviews DARPA projects to separate the imaginative from the nutty, the ripe from the premature?
Steven Pearlstein: I think you want to be careful here. DARPA is supposed to toy around with ideas that are out of the box. Some of them, maybe many of them, should be rejected in the search for the one or two that might be truly inspired. So when people like Senator Boxer call for the program manager to be fired, I think that sends the wrong signal. It is true that his bosses should learn a lesson about political sensitivity from all this. That would include John Poindexter, whose political modus operendi seems to be to try anything and hope nobody finds out about it.
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Springfield, MO:
Considering the possible consequences that could have resulted from this incredibly harebrained scheme, I'm increasingly cynical
of DARPA's "Total Information Awareness" program as well. These sound like just about the last people I would want to have access to sensitive personal information that the public might unwittingly be providing. And considering John Poindexter's past, he hardly seems the trustworthy party to be in charge here. What an insult to the American people!; Can we hope to see him fired?
Steven Pearlstein: It will be interesting to see if the Bushies will follow their natural instinct to rally around their own in the face of public criticism (loyalty is a two way street and is the most prized attribute in this administration). I suspect they will tough it out for a while, then quietly ask him to leave in a few months so it doesn't appear they are caving to the heathens in the press and Congress.
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Washington, DC:
You imply in your column that would-be assassins and others could manipulate the terrorism futures market for profit. But isn't that misleading? I heard an NPR report in which it was made clear that only a hand-picked crew of government and academic experts would be allowed to play in the market, and they wouldn't be profiting personally from their futures orders.
Steven Pearlstein: Not sure that was the idea, actually. The only way to surface information that wasn't already available would be to let a wider group of traders participate, particularly those from the region. You could do it the way you outlined, but I doubt it would improve on the accuracy of currently available information. As I wrote, the idea here is to encourage insider trading.
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Alexandria, Va.:
Don't the markets already make bets on terrorism? Or, to rephrase, isn't the prospect of a major terror attack already factored into various aspects of the global marketplace, from shares of certain companies to value of industry sectors and specific market exchanges?
Steven Pearlstein: Yes, indeed, although without much specificity. It is also difficult to tease out the terrorism discount from the overall price, so the information revealed by the market isn't that helpful. Also, most of the people trading stocks don't have very good information about a terrorist attack, so it is unlikely to be useful.
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Baltimore:
What's stopping someone in the private sector from launching a terrorism futures market?
Steven Pearlstein: Nothing except some laws governing futures markets.
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Alexandria, Va.:
Sorry for the long post, but your column today contained a number of logical inconsistencies which, when stripped away, pretty much undermine your argument.
First, much of your article seems to rest on the assumption that the administration wanted to use the DARPA project to replace current intelligence gathering, rather than to supplement it. I have yet to see any evidence of this, and you have not bothered to supply any.
Second, your critique of market solutions used elsewhere seems to rest entirely on the illegal manipulation of markets. Look, some people will always try and game the system, no matter what it is. That doesn't mean you junk the system outright. We certainly don't shutter the Big Board just become someone got caught trading on insider information. Instead, you see if there is some sort of structural flaw (the design of the California market falls into this category) and you fix it.
Finally, trading with inside information on a futures market isn't illegal (it can't be, or the market wouldn't function). And yes, people do try and manipulate the market (and occasionally succeed). But that doesn't mean that the market doesn't have great predictive value. That's all the DARPA project was looking to tap.
The only argument against the DARPA project is an emotional one. If you have emotional qualms (about possibly enriching terrorists, etc.) fine. But don't try to wrap an emotional argument in a logical veneer. It doesn't work.
Steven Pearlstein: That's a very good note but I think you miss the key point: in some markets, some participants can affect the outcomes/prices by what they do. And in this case, that is not only possible but likely. That is easier to police in the case of corporate executives. It would be hard to police in a terrorism futures market, and is a serious enough problem to call into question the value of the entire thing as an information gathering exercise.
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Columbia, Md.:
(Comment more than question.)
It is quite unfortunate that the reflex reactions of people who clearly do not understand the purpose of the proposed system (or if they do understand, underestimate the potential effectiveness of the system) has suddenly shut down a very promising and potentially life-saving program. I can somewhat understand the reactions of those who have never considered such an idea (99.9% of people), as those people do not have the necessary mathematical or economic background to even understand the how such a system makes logical sense, and is derived from basic principles. However, to simply come out and say something is "unbelievably stupid" when one obviously does not understand the principles behind the idea is unbelievably narrow-minded and short-sighted.
Steven Pearlstein: I'm not sure I called it unbelievably stupid, although lots of others did. I suspect they were thinking in terms of the politics and optics of it. Actually, I think I understand pretty well what the purpose was, and spent some considerable time talking to the academics who were behind both of the proposed markets yesterday. I also think I identified the flaw in their markets-as-revealer-of-agggragated-inside-information arguement. You obviously disagree. But I don't think it is fair to say I don't understand (in a non-PhD sort of way).
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Washington, DC:
Apart from the political, moral, and legal problems, it seems this proposal is non-sensical from an economic perspective. The proposal is based on the proposition that the market is a more efficient aggregator of information about the future than other methods of collecting information. But this holds only insofar as the U.S. government does not come in an "destroy" the market by obliterating the terrorists that are providing the information or whose actions the futures market is betting on. Who would put money on an outcome the U.S. is trying to prevent? And if people were betting that the event would occur regardless of the U.S. government's involvement, then would the U.S. be able to "beat the market" any better than anyone else? 80% of mutual fund managers can't beat the stock market; what makes the DOD or CIA think it can beat the "terror" market?
Dan
Steven Pearlstein: That's precisely the point. Imagine that the futures market signalled a high probability of an attack on DARPA headquarters. That information would be available to the bad guys, as would the expectation that the good guys would have moved to protect the site. So the bad guys would change their strategy, perhaps so fast that the new information couldn't be incorporated in the market. But then again, the good guys might anticipate that.....Anyway, you can see the spy v. spy v. spy kind of game theoretical exercises you could get into. The purists would argue this is exactly what the market would reveal. But I'm not sure it would if some of the parties set out to deliberately manipulate it. It has to do with the type and quality of the information we're talking about.
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Washington, DC:
Good morning Mr. Pearlstein:
Assuming the a market -is- the best way to make predictions about the sort of events DARPA intended this market to predict, why make it a financial market? I think that is the galling part. If it were just a running on a computer somewhere with no money to be made or lost, well, that's a somewhat more palatable proposition, is it not? Or does the lack of financial incentive serve to defrock the market of its efficacy as a predictive tool?
Steven Pearlstein: The theory was that unless the players have some stake, some skin in the game, the information would not be as credible nor would those with inside information be induced to participate.
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Manassas, Va.:
Why is it so outrageous to conceive a futures market on terrorist activities? Such futures market would gather information from millions of individuals into a final risk estimation. Much better than government intelligence agencies that couldn't or wouldn't exchange or coordinate their own intelligence due to interagency competition or plain old bureaucratic inefficiency.
Steven Pearlstein: Fair point.
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College Park, Md.:
I'm generally not a fan of the junta on PA Ave., but this time I have mixed feelings about their foolishness. On the one hand, it offers some rather perverse incentives and frightening insider-trading temptations. On the other hand, this plan could be a way to get at people's hunches, which they may be reluctant to share on the record otherwise.
What were the rules to be for this system? Was registration to be 100% verified? How much money could be 'gambled'? What actions or preventive measures would have been taken based on the 'market'? In short, how was this to be operationalized?
Steven Pearlstein: Can't help you there. Not sure all the details were published.
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Arlington, Va.:
I just have a comment today.
It's hard to believe that the Pentagon didn't consider that futures traders in this market might take steps to achieve the outcomes they were betting on. (It's apparent that if you're betting that an event will occur, and you're in a position to effect the outcome, then you'll consider taking action to increase the likelihood of the event occurring.) All we need is another group of people with an interest in increasing terrorist activity. This incident has caused me to lose confidence in the Pentagon's strategic planning ability.
Steven Pearlstein: Apparently you are not the only one.
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Washington, D.C.:
I really don't understand the logic behind this program. Past demonstrations have shown that ordinary Americans can predict elections and movie ticket sales, but these are consumers/the public predicting what they will consume/choose in the next few weeks. Terrorism is hardly a consumer product. Where would the pool of participants come from? The public? Federal Agencies? The world?
Steven Pearlstein: They were going to limit it to 1000 people at first, but only for technical and logistical reasons. Ideally, it would be wide open.
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Virginia:
Admittedly, I don't know much about futures markets -- but I'm not getting the point here. How would investors have any idea what's going to happen, much less enough of an idea to actually help the Pentagon figure out when attacks and the like are imminent? Was the idea that most of the investors would be people knowledgeable about intelligence issues? If so -- why should they speculate on futures rather than just tell us what they know? Was the idea that the futures market would have provided them with monetary incentive to tip the Pentagon off about terrorists' plans?
Steven Pearlstein: One way to look at a stock market, say, is that it is a place where people who think they know something about a company or an industry or the economy place a bet on the theory that they know or intuit something the market doesn't (because if the market saw the same potential for IBM to go from 90 to 100, it would otherwise have already priced the stock at 100). Now a futures market in terrorism would tend not to attract large numbers of people because large numbers don't have hunches or information about the subject. But those who do might be induced to trade in their inside information or insight if they could profit from it. Theoretically, all that is perfectly sound. It's what happens after that where, I think, you get into problems, not only in the way the market would play out but also the politics of the whole thing.
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Montclair, NJ:
I'm a Liberal Democrat who thinks the F 22 is a huge waste of money and would like to see the Pentagon's budget decreased by 20% or so. But I think the futures market idea is a good one and the chest-thumping politicians who decry it seem very narrowminded to me. The wonderful thing about a market (I'm not that liberal) is that there is no incentive to hide information, as there would be if we were just to ask experts to predict the likelihood of an attack. I think the project should go forward, with maximum involvement from everyone and for real money. Anonymity should be guaranteed. Who knows: if there were a sudden spike in the people offering to bet on a terrorist attack tomorrow, doesn't that say something?
Steven Pearlstein: Well, that nicely puts the argument in favor of the market in terms everyone can understand. Thank you, Montclair.
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Columbia, MD:
The idea behind this kind of market is not potentially flawed in the same kind of way as a regular stock market. The reason is that the prices are based on probabilities. This is something that has an actual true value, unlike the price of a company stock which is a combination of many factors, including future growth potential, etc.
Steven Pearlstein: Also, true.
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Washington DC:
Steve,
You must be an Enemy Combatant, or at the very least a Commie, for doubting the efficacy and appropriateness of the market as the solution to all problems in every facet of life. I'm informing the Department of Homeland Security.
Steven Pearlstein: I've always wanted to visit Cuba.
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Glen Burnie, Md.:
Actually the idea is not a bad one but it confuses the nature of futures markets predictive ability with terrorism. Futures markets can summarize the consensus of the market actors because they have information or experience and factor this into their market activities affecting prices through supply and demand. However, it is unlikely that market operators in the terrorism "market" have similar information (unless they are the terrorists themselves and it is unlikely they will be playing this game). Lacking similar information the terrorism futures market will fluctuate wildly based on the views of sheer speculation and so will have little or no predictive ability and, in fact, will confuse those trying to interpret its trends.
Steven Pearlstein: That's a good statement of one argument against. The theory behind the idea was that the market would attract players who, if not the terrorist themselves, might have bits of information that, when aggregated, might have predictive value. Friends and neighbors of terrorists, say.
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Mt. Lebanon PA:
Why does Congress always oppose ideas that aren't from the 1950s? This futures trading intelligence market I think is a wonderful idea. It's not trading lives for intel - it's saving lives from Congressional cluelessness and timid inaction. Thanks much. HLB
Steven Pearlstein: Actually, as I said, giving bad guys money for information is a tried and true intelligence gathering technique. morally repugnant? Sure. But useful. The only thing is that it is done in private, so snoopy Congressmen and journalists never find out.
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Dallas, Texas:
The concept of a market to test and vet the probability of various scenarios is not new but it is a very clever and actually brilliant concept. It is so far ahead of where we are today and it is a real shame for uninformed politicians and columnists to mischaracterize and lampoon it. We just lost a potentially very valuable tool. We also lost some bright minds in DARPA who are likely to be fired - even after they were carefully mentored and gave their minds and hearts to create tool to help us fight the war on terror more effectively. This is a scientifically valid concept which we now won't have. How can we win the war on terror when the government is not allowed to be forward thinking? Your reaction?
Steven Pearlstein: My reaction is that you state your point of view well. I too hope the program manager isn't fired or have his career damaged in any way. I just happen to disagree about how valuable a tool this would be in this instance.
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Memphis, Tenn.:
So, would the trading have been open to anyone, including terrorists? And how difficult would it be to manipulate the predictive accuracy of such a market if, say, a terrorist wanted it to seem that a certain event was not going to occur?
Steven Pearlstein: Not very, in my opinion. But market purists don't think the manipulation would be that easy. They reduce it to this argument about noise and signals and game theory that is a bit mind numbing but, in the end, wasn't particularly convincing to me.
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Washington, DC:
I agree with your response to "betting on death" and am, frankly, perplexed by reactions to this program that suggest it would just be some gruesome game...perhaps certain participants would view it that way and yes, perhaps it would not work - but there seems to be academic research supporting the concept. These over the top reactions - like Barbara Boxer's - seem to be loud voices from people who just feel like they have to say -something-.
Unless I'm mistaken, DARPA is the same agency that brought us compter networking? Thus the internet - thus this discussion - Perhaps we should all be a little more open minded and give the predictive ability of markets a chance to succeed - or fail - like we might any other intelligence-gathering mechanism.
Steven Pearlstein: Well said. I'm a DARPA fan to some extent. But I also think they get coopted by the policy folks and generals at the Pentagon. See missile defense folly.
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Edgewater, Md.:
I'd like to put some perspective on the "shock" value of particular markets. Our experience at NewsFutures.com is that what people find repugnant can vary widely depending on which country you live in.
For instance, when we created markets about when the war on Iraq would actually begin, no american trader ever complained. The French, however, were horrified. But the reverse was true concerning the market we had on when the Washington area sniper would be caught (note: that's very different than betting on whether he'd kill more).
So, independently of the merits of the Pentagon' plan, horror and indignation have to be taken with a grain of salt...
Steven Pearlstein: Interesting.
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Bethesda, Md.:
The relevant (and obvious) difficulty with the 'terrorism futures market' is what economists refer to as 'moral hazard'. There's a moral hazard in any kind of insurance -- However, there is also (at least in theory) a risk of incurring a penalty for, say, murdering someone in order to collect on their life insurance policy. Given recent experience with this sort of thing, it's hard to believe that the DARPA people considered it just a 'technical' problem.
Steven Pearlstein: Precisely my point (only I try not to use words like moral hazard in print).
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Chicago:
There was an interesting article the other day on how this market would actually be self-defeating. If the government is monitoring the market and sees the likelihood of an event go up, then it will actively work against this event occuring, thus an increase in the expected chance of a terrorist attack could actually lessen the chance of a terrorist attack.
This stems from the idea that the stock market and others like it are not truly efficient because we base a lot of our decisions about true value on what others value, which then skews our own value of the future and stock, and so when this happens on a wide scale all of the information is skewed, creating either a bubble or a panic. If you know that everyone else values a stock higher than you do, then you will still buy it and drive the price higher knowing that someone else will still buy, thus making the collective wisdom of the market inaccurate and creating a price bubble.
Steven Pearlstein: This is what Keynes called the beauty contest problem and it is the essential element in a market bubble. So, for example, if a movie were to come out about a terrorist attack, that might send the probabilities on the futures market higher for a sustained period of time as the thing snowballs and people start to trade up on the theory that it will all trade up even more. We know bubbles can last for quite a long time -- certainly longer than the time horizon you'd like if you were an antiterrorist official.
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Washington, DC:
You missed one major critique of this rather idiotic DARPA idea. To (probably mis-)paraphrase Ben Graham, the market is in the short run a voting machine, and only in the long a run a value machine. In the short run, it's no better than a random walk.
That's why, leaving aside non-market issues (imperfect or biased info, etc...), this could never work. Terrorism is, almost by definition, a short run variable. It's not likely that a terror group is going to seriously plan out an action over a long period of years (and , using the last bubble as an example, the "short run" can be as long as 3-4 years in any given sector). Ergo, this market would not be worthwhile for anything other than long term trends, which we can pretty much guess out with experts anyway. We all knew that radical islamicist terrorism was a problem. But a market wouldn't get even the generalities of any specific action.
Compare that to the fact that one subject matter expert, namely Tom Clancy, already wrote fiction offering a 9/11 scenario years before. The "market" isn't going to tell us anything we don't already know.
Steven Pearlstein: you said it better than I. Want to fill in for me on my vacation?
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Alexandria, VA:
You mention in your column how markets can determine worth and you cite Wall Street and ebay -- two wildly dissimilar markets -- as being reasonable arbiters of value. I'm no economist but I highly disagree. I've been on ebay selling CD's and videos for 5 years and I can say from my limited personal experience that one man's trash is another man's treasure. I can go to a store in the area, find a CD or video that has been on the shelf for $1 for a year and yet on ebay it's a rare item and it fetches far more than it's reasonably worth. The flip side is when ebay is flooded with something quite popular and common -- just because a hit CD sells quite well for $12 in Best Buy doesn't mean you'll get that much online for it.
The analogy to the futures market at the Pentagon would appear to be this: the people involved already place a higher value on certain hotspots and hence the betting (for lack of a better term) goes up -- people pay attention to Iraq and wager on when terror attacks against troops are likely to take place. However, there are other areas of the world that have terror attacks frequently and yet, since they are not of strategic interest to the people using this futures market, there are no bets, no wagering on those areas.
I think I'm trying to ask -- isn't the whole idea a little bit out-of-whack to begin with since the people using it have a skewed view of what areas are important?
To say nothing of the despicable lack of morality in the whole thing.
Thank you
Steven Pearlstein: Not sure I fully understand your complaint but I'll let it speak for itself.
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Fredericksburg, Va.:
I think the DARPA futures market is absolutely brilliant. Experts often have insights into what will happen, and letting academics and those involved in foreign affairs do that would probably yield very useful results. I don't think your average person should be involved, but if only those people who knew what they were doing were, then it would probably work out very well. It wouldn't be "betting on death;" the primary motive would be to reach an intelligence consensus, not to profit.
Steven Pearlstein: There's more disagreement on this subject than I would have expected, which is a good thing. This has been a good discussion.
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Austin, TX:
It was my understanding that DARPA's plan for a terrorism futures market was going to limit trading to 1000 prescreened members. If this is true, do you think it undercuts some of your arguements about the danger of manipulation and insider trading?
Steven Pearlstein: I'm not sure of the pre-screening but if it were pre-screened, then the rationale for the whole thing -- surfacing bits of useful information not otherwise available -- would be greatly diminished. Polling 1,000 middle east experts would be easier way to pick their brains than running a market.
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Oxford, MS:
Isn't there something fundamentally different about this futures market and other ones, namely that in most markets all the investors have the same goal: to choose wisely and make money. But in this market, some (and who knows how many) of the investors may have an entirely different goal: to undermine the efficacy and predictive ability of the market itself.
Steven Pearlstein: Precisely.
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Baltimore:
I have read that the identities of the traders on this market would be kept secret to protect the integrity of the system. Given the methodology, this seems important. But then, doesn't it seem far-fetched to assume that someone with a particular 'hunch' about a terrorist plot would have to trust in the government to refrain from tracking him down to determine who this person is, and how they came to have information about a terrorist plot? On the other hand, even if the person does trust that he won't be tracked down, doesn't it seem perverse to let all these people trade on the markets without investigating how they came to have this information?
Steven Pearlstein: Another good point worth making.
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Westcliffe CO:
Steve - I've been to Gitmo - US Navy early 1970s]. It's not all it's cracked up to be. The days are hot, clear, and long. But the nights and the 40 cent drinks and everyone watching the outdoor motion pictures and the geckos climbing the patio walls.. well, it's enough to make you think of paradise.
Then again, I don't know if POWs get 40 cent pina colladas.
Steven Pearlstein: Thanks for the update. I'll pack plenty of books and bottled water.
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Atlanta:
In your column today, you indicate that the markets manipulated the power prices in California and therefore the markets should not be deregulated in the electricity industry. While the first statement is factually correct, it really doesn't imply the second statement at all. The markets were set up so that they could easily be manipulated - and they were set up by the government in California - despite the protests of business that it would be a terrible failure. The way the markets were set up allowed businesses to manipulate the prices. Had they been set up differently, things would have worked out very differently. Additionally, the electricity markets in California are vastly underserved, but it is quite impossible, given the environmental groups and the government in California, to build a new power plant. Therefore, given supply and demand, there isn't enough energy to go around so therefore, the prices go up. Very simple concept. In a few years, when the economy turns around, there will again be a terrible shortage of power in California.
Many state governments (and utilities) are using what happened in California to tell people that the energy markets should not be deregulated. However, the governments are the ones who have set up the markets quite poorly, and the utilities are quite happy about that. So the utilities will be able to be run inefficiently because most people don't quite understand the reality of what happened - and this costs people more money in the long run (although they don't understand that, either).
Steven Pearlstein: I agree with you that California was a case of bad market design. Wrote a long, long, long article on that once. Those problems can be fixed. I'm not sure the problems with this terrorist futures market can be.
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Steven Pearlstein: There were lots more comments we couldn't get to, but time is up. Thanks folks. See you next week.
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