Even More on Terrorist Futures
My apologies to those of you who are sick of this subject, but this is something that I think is really messed up. My main objections to this aren’t moral (although I do think betting on future attacks is a very morbid), but I honestly don’t think this will work. There’s a number of good articles that debunk this market-based voodoo. Among the best are this one from Slate :
- Set aside for a moment the cognitive dissonance of a conservative, faith-based administration using government-sponsored gambling to set policy. And forget that the market represented an effort to meld two secretive cultures that have been discredited for their recent catastrophic failures?Wall Street securities analysis and Washington intelligence analysis.
More important, a havoc market wouldn’t benefit from the rationality that regular financial markets require. By and large, markets for futures?as well as stocks and bonds?are presumed to be efficient and rational, Internet bubble notwithstanding. This collective rationality is precisely what the Pentagon was hoping to harness by creating a market for geopolitical events.
But in the Middle East, many of the figures who would have driven the pricing of PAM securities are not what international relations types refer to as “rational actors.” Suicide bombers almost by definition are irrational, or at least not governed by a rationality with which we are familiar. We routinely refer to the main players with terms that place them beyond the field of reason?Saddam Hussein is “the Butcher of Baghdad,” Osama Bin Laden is a “madman.”
By contrast, while Federal Reserve Chairman Alan Greenspan may be inscrutable, and many executives engage in short-term behavior that causes long-term damage, almost all market movers?chief executives like Warren Buffett and Michael Dell, mutual fund managers?collectively exhibit a far higher level of rationality than, say, Mullah Omar. It’s far easier to get inside the head of Sandy Weill (he wants to acquire more banks) than it is to plumb the Machiavellian depths of Yasser Arafat’s mind. How can we expect rational people to make sound bets on minds that may be unsound?
Another potential problem was that the market might defeat itself. The Pentagon wanted to create the PAM in order to gather information it could use to stop terrorism and reduce instability. If it saw, say, that people were betting heavily on the assassination of Iraq’s interim president, the Defense Department would start searching for some assassination plot in the hopes of rooting it out. But preventing the assassination would cause all the people who bet on it to lose their money. Insofar as the market helped the United States stabilize the region and prevent terror, investors would suffer. The more it succeeded on policy, the more it would fail as a market, and the sooner it would collapse.
…and this comment from a reader of Tapped :
- The way that markets work, at least in theory, is that persons who have knowledge, or think they do, are willing to “buy” that position. In a futures market like the Iowa one, people are essentially betting on a particular outcome. Presumably the knowledge or insight they have about that is based on the intelligence they gather — reading newspapers, hearing candidates, judging the opinions of friends, neighbors and commentators. That information may not be accurate, or some participant might have more current information or more detailed sources — but it is information that is available to everyone, because political candidates act in public, and people’s opinions are expressed in one way or another.
But for the Policy Analysis Market to work, participants would have to have knowledge of terrorist threats and activity. Now, the terrorists themselves aren’t going to be engaged in the market (unless they are trying to profit from their own violent deeds), so the participants would have to be those who have some intelligence on the basis of which to purchase or sell a position. Without that intelligence, it’s just gambling. But who has that intelligence? We’ve already seen the logistical, political and interpretive problems that the CIA and other “official” intelligence gathering agencies have. Would a participant in this market field their own intelligence agents to compete with the CIA? (That would take privatization of government functions to a new low!) Without that intelligence, there is no basis for the market to reflect anything other than persons taking a guess at a result. That wouldn’t be a useful tool for policy analysis. You and I might believe that there is no known rational basis for an “orange” terrorism alert — and we might plan our actions on the basis of that belief — but the rationality of that belief has no bearing on whether there truly is a heightened security problem.
Even in their support of this idea, Wired magazine had to admit that predictive markets aren’t perfect :
- The Iowa market hasn’t been perfect — it forecast a Democrat-controlled senate in 2002. But over the course of 14 elections, the Iowa Electronic Markets’ stock prices were on average a half of a percentage point closer to the results of the actual political races than the final polls were.
The price of orange juice futures has even been shown to accurately predict the weather, noted David Pennock, a senior research scientist at Overture Services who has done extensive surveys on the reliability of such markets.
Traders on the Hollywood Stock Exchange last year correctly picked 35 of the 40 Oscar nominees in the eight biggest categories, according to The New Yorker magazine.
Setting up intelligence analysis as a game will only result in people making predictions based on spotting trends, when they should only be making predictions based on intelligence. Picking 35 out of 40 Oscar picks may be a neat trick, but we’re not trying to write a pice for Entertainment Weekly here, we’re trying to make decisions that shape the future of our country and could ultimately prevent or lead to the deaths of hundreds of thousands of people. This requires perfect information, not speculation based on undefinable trends.
Ultimately, markets tend to reward those who already have a lot of capital to begin with. If this market existed last year, do you think the miniscule bets of Joseph Wilson and other peeons in the CIA would have been enough to offset the market trend that favored the idea that Iraq had a nuclear weapon? Of course not. And that’s ultimately why this is a bad idea.
A Terrorism Futures market wouldn’t be able to tell the difference between good trends and bad ones. Buying a hundred shares of the truth won’t make much of a dent when your superiors are buying a million shares of self-serving bullshit. Especially since the whole plan doesn’t account for exactly what the data is that’s influencing the trends.
That said, DARPA does deserve credit for “thinking outside the box” (that phrase sends chills down my spine), but there’s got to be a better way to get people to share data than this.
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But in the Middle East, many of the figures who would have driven the pricing of PAM securities are not what international relations types refer to as “rational actors.” Suicide bombers almost by definition are irrational, or at least not governed by a rationality with which we are familiar. We routinely refer to the main players with terms that place them beyond the field of reason?Saddam Hussein is “the Butcher of Baghdad,” Osama Bin Laden is a “madman.”
Okay define irrational.
That is the problem economics has struggled with for a long time. It is a mistake, I think to think that because another person does not share your goals or even your views that they are “irrational”. Further, even if the suicide bomber is himself irrational, are those who “control” and direct the suicide bomber irrational?
By contrast, while Federal Reserve Chairman Alan Greenspan may be inscrutable, and many executives engage in short-term behavior that causes long-term damage, almost all market movers?chief executives like Warren Buffett and Michael Dell, mutual fund managers?collectively exhibit a far higher level of rationality than, say, Mullah Omar.
Again, your are using your own definition of rationality. And it begs the question again of what is irrationality?
Acting randomly? Acting in a self-destructive manner? Was Mullah Omar or Saddam self-destructive? Is it irrational to take big risks? What if you like taking big risks?
Here is one to consider: Are drug addicts irrational or have their objectives been changed by their drug abuse? If they are irrational then you cannot predict their behavior. However, I think we can predict their behavior: they will get high and in such pursuit will forgo other consumption (i.e., food, housing, etc.).
Another potential problem was that the market might defeat itself. The Pentagon wanted to create the PAM in order to gather information it could use to stop terrorism and reduce instability. If it saw, say, that people were betting heavily on the assassination of Iraq’s interim president, the Defense Department would start searching for some assassination plot in the hopes of rooting it out. But preventing the assassination would cause all the people who bet on it to lose their money. Insofar as the market helped the United States stabilize the region and prevent terror, investors would suffer. The more it succeeded on policy, the more it would fail as a market, and the sooner it would collapse.
Maybe, but there are also those who bet that the assassination wont happen or will be foiled. The more people bet on something happeneing the higher the payoff will have to be that it wont happen to get people to bet with you.
For example: I suck at basketball…I mean I really, really suck. Now, suppose I was to play one-on-one with Micheal Jordan.
Who would guess would win?
Now would you be willing to bet $10 for a $20 payoff that I’d win? No? How shocking.
How about $1 for a $10,000 payoff? Oh, you might be willing to “waste a buck…maybe Steve’ll get lucky or Micheal Jordan’s legs will fall off.”
Even in their support of this idea, Wired magazine had to admit that predictive markets aren’t perfect
Whoever said this would be perfect or even work. My understanding it was to be an experiment.
Setting up intelligence analysis as a game will only result in people making predictions based on spotting trends, when they should only be making predictions based on intelligence.
I hate to break it to you, but one of the key tools in intelligence is Game Theory which assumes that the actors are hyper-rational. Also, spotting a trend should be part of intelligence work, and knowing that trends can change should be as well.
Basically the logic here also argues we shouldn’t be wasting hundreds of millions of dollars on drug research. Most research programs will yeild little or nothing. Think of the good we could do with that money if spent elsewhere! Of course, we’ll have no more new drugs…and as a result people will die…but at least we’ll be using the money well. Or not.
Comment by Steve — July 30, 2003 @ 3:51 pm
So “shorting” America may have some benefits? To investors? To America? To the world? To the terrorists? How about a futures market for religion?
Comment by Shag from Brookline — July 31, 2003 @ 4:43 am
I’d bet, er I mean invest, in the likelihood that Jesus isn’t ever coming back – I’d also buy 200 shares of “Sky deities who are obsessed with people kissing their asses on the weekend really suck”. I’d make millions!
Comment by Ross Angeles — July 31, 2003 @ 9:14 am
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Comment by Rev.charls bolts. — January 5, 2004 @ 5:06 pm