Daily News (New York)

                  August 3, 2003, Sunday SPORTS FINAL EDITION

SECTION NEWS; Pg. 20

LENGTH 639 words

HEADLINE OLD IDEAS HOBBLING NEW THINKING

BYLINE BY LOU DOBBS

BODY
The Pentagon caved in to Democratic criticism last week and pulled the plug on a
program called the Policy Analysis Market. It also pulled the plug on retired
Admiral John Poindexter, who ran the market.

   The market would have allowed traders to speculate on economic and political
events in the Middle East, including assassinations and terrorist attacks, using
an artificial market.

   Sen. Ron Wyden (D-Ore.) called the program "repugnant" and "morally wrong,"
Sen. Byron Dorgan (D-N.D.) described it as useless, offensive and "unbelievably
stupid" and The New York Times piled on with an editorial calling on the
Pentagon to fire Poindexter. Defense officials said he would resign in weeks.

   There is a minor problem with all their declarations about the market It
just might have been the most accurate predictor of terrorist activity available
in the war against radical Islamists.

   As it turns out, markets like these are actually very successful at
predicting nonfinancial outcomes and events.

   The best-known example is the Iowa Electronic Markets, a system set up in
1988 at the University of Iowa as a way to examine the behavior of markets. The
system has since successfully predicted the outcome of every presidential
election.

   Similar markets have been successful in other areas as well. Professor
Richard Roll predicted the weather in Florida, using the price of frozen orange
juice futures, more accurately than meteorologists. And an artificial market at
Hewlett Packard, which compiled sales estimates of select employees, beat the
company's official sales forecast 15 out of 16 times.

   Opponents of the Policy Analysis Market, including Sen. Tom Daschle (D-S.D.),
complained that it would produce undesired side effects, saying the market would
be "an incentive actually to commit acts of terrorism."

   Even by Daschle's standards, that rhetoric is hyperbolic nonsense. In
reality, the scale and size of this market was such that it would be highly
unlikely that traders would attempt to sway outcomes.

   Eric Zitzewitz, assistant professor of economics at the Stanford Graduate
School of Business, said Daschle "has the magnitudes wrong. My guess is that you
'd be hard-pressed to make more than $1,000 playing that sort of game, and I
have no idea what the going rate for an assassination is, but my guess is it's
quite a bit above that." In actuality, the maximum gain from a trade was to be
limited to less than $100.

   Sen. Jeff Bingaman (D-N.M.) called for Poindexter's resignation. In an
exceptional display of narrow-minded, hidebound thinking, Sen. Barbara Boxer
(D-Calif.) proclaimed, "If it's going to end, I think you ought to end the
careers of whoever it was who thought that up." Left-wing conformity, anyone?

   And what about the right wing? I thought that Donald Rumsfeld liked
out-of-the-box thinking, but Deputy Secretary of Defense Paul Wolfowitz couldn't
disavow the program fast enough.

   We will never know if the Policy Analysis Market would have been successful.
But if there was even a small chance that it could have been a useful tool,
there should be further discussion.

   Curtailing innovative thinking

   This is, after all, not a matter of partisan politics, but one of national
security. And forcing the resignations of those involved is a strong deterrent
to progressive thinking, of which we have no surplus.

   William Douglas, the former Supreme Court Justice who also served as
Securities and Exchange commissioner, said, "The great and invigorating
influences in American life have been the unorthodox the people who challenge
an existing institution or way of life, or say and do things that make people
think."

   Thinking isn't always the strong suit of either the left or the right. And
thinking is our best weapon in the war on terror.

   Email loudobbs@nydailynews.com