TCS Daily

The Futures and Their Enemies

By Pejman Yousefzadeh - May 14, 2004 12:00 AM

The use of futures markets, while still relatively sparse, represents an excellent method to help determine the best approach to key policy issues, and to predict certain policy outcomes. Instead of merely relying on a small coterie of individuals to analyze and predict outcomes in the policy world, futures markets make use of a wide variety of opinions, predictions and analyses from diverse sources to help determine policy on particular issues, and to predict outcomes.

Thus, just to cite just one example, we have the Iowa Electronics Market to help us predict election outcomes by encouraging participants in the market via the Internet. The participants then help predict an electoral outcome by bringing the mechanism of the futures market to electoral prediction and analysis, and by encouraging traders to correctly predict the results of an election by offering a financial reward as an incentive. The Electronics Market has a good reputation at predicting electoral outcomes, outperforming polls in the majority of cases. Needless to say, the concept of using futures markets for predictive and analytical purposes has spread to other areas as well.

One such attempt to utilize futures markets came about when the Defense Advanced Research Projects Agency (DARPA) sought to use the model of futures markets in the war on terrorism. The market would make use of online speculators betting on whether certain acts of terrorism, coups, and other political developments would occur, and where or when they may happen. But because certain public officials found the idea of betting on, say, the assassination of American political officials "repugnant," the program was terminated.

Some of the concerns surrounding the termination -- such as whether terrorists may seek to mislead the market by not betting on outcomes they know will actually happen -- are reasonable. But in the long run, as Ronald Bailey points out, such efforts are fruitless since futures markets are already filled with actors trying to mislead the market -- actors who end up losing money to those who use better information to make more accurate predictions.

There is also the concern that terrorists may make a profit by betting on acts of violence that may happen and are being planned. However, Bailey reminds us that in that case, terrorists end up tipping us off to their plans -- thus helping us to keep those plans from coming to fruition. In the event that certain transactions and wagers look especially suspicious, they can of course be traced and tracked, perhaps helping the United States capture terrorists in the process.

The other concerns -- that betting on terrorist outcomes and violent political occurrences is somehow "repugnant" -- are simply absurd. Terrorism itself is repugnant -- the futures market is merely an enhanced intelligence gathering operation that helps pattern and stop potential terrorist operations by using a model more effective than merely relying on the traditional group of intelligence analysts, pundits and experts to engage in analysis and prediction. One of the objections to the DARPA project was that potential terrorist threats "should be met with intelligence gathering of the highest quality -- not by putting the question to individuals betting on an Internet Web site," in the words of Senators Byron Dorgan and Ron Wyden. However, the Senators should have noted the accuracy of futures markets in other areas before making such arrogant and dismissive statements. Far from being a frivolous project -- and if the success of other futures markets is any guide -- the terrorism futures market would have enhanced intelligence gathering, not diminished it.

All of which is why it is good to see that the terrorism futures market has made a return. The TerrorXchange will help strengthen intelligence gathering and the implementation of preventive counterterrorist measures through the use of the futures market model. It provides access to breaking national and international news and the ability to comment on the news, its stock listing runs the gamut of potential political scenarios, and it even helps people prepare for any terrorist attacks. It is a useful supplement to official counterterrorist and intelligence measures, and will hopefully be studied and made use of.

Hopefully as well, public officials will be further educated and, in the future, more open to the kind of out-of-the-box thinking that helped conceive the idea of a futures market to analyze, predict and ultimately, deter terrorist threats. Almost everyone agrees in principle that the war on terrorism is "a different kind of war." Unfortunately, not everyone seems willing to actually treat the war on terrorism as the asymmetrical struggle that it is. That needs to change. The terrorists have no illusions about the kind of war they are fighting against us. Neither should we. Only by pursuing unorthodox but effective counterterrorist measures, only by remaining at the forefront of innovation will the United States put the forces of international terrorism to rout. We can bring a great deal of intellectual capital to bear in fighting terrorism. There is no need for us to refrain from doing so.

Pejman Yousefzadeh recently wrote fro TCS about the blogosphere growing up.


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