Can a ‘terror futures market’ work?

[PinkFloyd40]

Can a ‘terror futures market’ work?

Defense Dept. project aims to let ‘investors’ bet on events

By John W. Schoen

MSNBC

July 28 — The conventional wisdom holds that financial markets combine the collective wisdom of the millions of investors who participate in them. So what if you could use that market force to help predict political upheaval in volatile places like the Middle East? That’s exactly what a Defense Department project is trying to do — despite Senate critics who say the effort is nothing more than state-sponsored “gambling on terrorism.â€

THE PROJECT IS modeled on “futures†exchanges like the Iowa Electronic Markets, a popular Web-based market that lets political junkies place bets — with real money — on the outcome of political elections.

The Policy Analysis Market, which is set to begin signing up “investors†on Friday, is designed to let Middle East experts place bets on political and economic events in the Middle East, according to Charles Polk, president of Net Exchange, a small San Diego, Calif. company hired by the Pentagon’s Defense Advanced Research Projects Agency, or DARPA, to set up the market.

“This isn’t really a terrorism market,†he said. “What we’re trying to do is look forward a year into the future and try to glean some insight into political and economic and military currents in the Middle East.

During the initial test phase, the site will be limited to 100 “traders,†chosen from Middle East experts at universities and think tanks, who will get $100 each to buy and sell futures contracts based on events in eight Middle East countries. The online trading system could eventually be scaled up to include 10,000 traders.

Possible “contracts†could include questions like the overthrow of the king of Jordan or the assassination of key figures like Yasir Arafat. These contracts would deal with events in each country related to five major categories: military preparedness, civil stability, economic health, U.S. military involvement and U.S. economic investment, said Polk.

The market is also designed to allow trading in “derivatives†and complex hedging strategies — linking, say, renewed economic growth in Israel to the prospects of approval of Palestinian statehood.

By placing thousands of individual bets, market participants would shape forecasts about future events. The value of the contracts would fluctuate based on market participants’ beliefs about the likelihood of specific events taking place — moving higher if they appeared likely and lower if unlikely. Contracts will expire quarterly and extend a year and a half into the future. Each contract would be fully valued at $1 — the payoff for an accurate prediction.

“You can go into the (Policy Analysis Market) and ask it for that derivative: ‘If U.S. involvement here were to increase, please give me a quote on Syrian civil stability,’†said Polk. “You just ask for a quote.â€

But a pair of U.S. Senators doesn’t think this is all such a great idea. On Thursday, Sen. Ron Wyden (D-Ore.) and Sen. Byron Dorgan (D-N.D.) called on the Defense Department to halt the project, saying the “terror-wagering scheme†was a waste of taxpayer dollars — especially after a recent report on Sept. 11 citing breakdowns in conventional intelligence gathering.

“We don’t need a lot of fictional scenarios,†said Wyden in a telephone interview. “We’re not dealing with communication and follow-through in the real world; we think that’s what ought to be the focus, rather than trying to chase down these mysterious scenarios with taxpayers dollars.â€

Among other things, the senators say they’re concerned that terrorists could place bets on the site — and then profit from the accurate prediction of attacks that they carry out. DARPA has promised investors that it won’t be able to identify individuals who sign up for a trading account.

But Polk says that — if terrorists were to bet on their own attack — that would create exactly the kind of warning signal the Policy Analysis Market is designed to highlight.

“They’re going to move some prices,†he said. “And they’re going to move those prices to levels way above where the market has been striking them. So people are going to say, ‘Why is that price up?’â€

But it remains to be seen whether the project will get out of the planning stages. Polk says the project is funded through March, 2005.

DARPA officials declined a request for an interview. The agency said in a statement late Monday that “research indicates that markets are extremely efficient, effective and timely aggregators of dispersed and even hidden information. Futures markets have proven themselves to be good at predicting such things as election results; they are often better than expert opinions.†But DARPA said it “will continue to reevaluate the technical promise of the program before committing additional funds beyond Fiscal Year 2003.â€

Wyden says he’s already forced the Defense Department to obtain Congressional approval before going beyond the initial test phase. And he’s hoping to kill the project altogether in an upcoming House-Senate conference on defense spending.

“This far out stuff — at a time when we’re not dealing with the basics — is not a good use of resources and the limited dollars that are available,†he said. “Trading on corn futures is real different than trading on terrorism and atrocity futures. One is morally fine and represents free enterprise, and the other one is morally over the line.â€

Backers of the project are hoping that, if it catches on, the Policy Analysis Market could eventually be used by companies trying to hedge the risk of doing business in the Middle East.

But even if the project is allowed to go forward, it’s also not clear whether this futures market has much of a future beyond a parlor game among Middle East analysts. For one thing, companies already have well-established markets for hedging risks.

Moreover, the volatility of the region would likely wipe out any traders who decided to jump in, according to Jim Placke, a Middle East analyst with Cambridge Energy Research.

“The potential for major losses is always likely to outweigh gains,†he said.

--------------------------------------------------------

not sure where i stand on this yet.. gonna take some time to really form an educated opinion i think...

[DJGaryMatthews]

a guy at work was talking about this today. this is one of the craziest ideas ive ever heard of. betting on terrorist attacks???

[dirtyepic18]

how do they come up with this shit?

[bassboy]

i don't think it's ethical but it would take up half of my free time if this kind of thing existed.

[georgym]

Thank you, republicans, for another ridiculous idea

[PinkFloyd40]

to all the negative responses on this thread, do you understand the rationale for this potential program?

[phuturephunk]

Originally posted by PFloyd40

to all the negative responses on this thread, do you understand the rationale for this potential program?

...They have no idea, nor is it worth explaining...

[PinkFloyd40]

Originally posted by phuturephunk

...They have no idea, nor is it worth explaining...

so then i'd be safe in assuming you agree?

[phuturephunk]

Originally posted by PFloyd40

so then i'd be safe in assuming you agree?

..yes, I find it a very fascinating idea, and i would have hoped that the experiment could have gone unfettered...Then again, we know what happens when politicians and political spin with the media get involved......

[PinkFloyd40]

Originally posted by phuturephunk

..yes, I find it a very fascinating idea, and i would have hoped that the experiment could have gone unfettered...Then again, we know what happens when politicians and political spin with the media get involved......

you get responses like the ones on this thread

extensions of free market principles in seemingly unorthodox situations have proven effective in the past and present.. being a champion of free markets my first inclination is to affirm their viability here as well, but this is much more complex then weather futures and tradeable permits for firms with poor enivornmental records

[breakbeatz2]

Originally posted by PFloyd40

you get responses like the ones on this thread

extensions of free market principles in seemingly unorthodox situations have proven effective in the past and present.. being a champion of free markets my first inclination is to affirm their viability here as well, but this is much more complex then weather futures and tradeable permits for firms with poor enivornmental records

you're also from Stern right? did you graduate already?

about the idea, its definitely ingenious, but you gotta admit that it could potentially lead to some misleading info, and this could also potentially be used for exactly the opposite purpose that it was intended for.....

[georgym]

Originally posted by phuturephunk

...They have no idea, nor is it worth explaining...

well, referenced by today's article in the Newsday, it says that "The Policy Analysis Market is intended to help the Pentagon predict events in the region based on investors' information or analysis..."

also:

" this would be a joint program of the Pentagon's Defense Advanced Research Projects Agency and 2 private companies: Netexchange and the Economist Intelligence Unit (of the Economist magazine)..."

So, in other words, we would be putting important policy making decisions in the hands of people who are rooted in making a buck and having fun, not truly in mind of protecting the national security.

That's what i don't like... that it's rooted on making money.

To quote Democratic Senator Ron Wyden and Byron Dorgan: "Surely such a threat should be met with intelligence gathering of the highest quality--not putting the question to individual betting on an internet website.

SO, like i said before,

[georgym]

Originally posted by breakbeatz2

about the idea, its definitely ingenious, but you gotta admit that it could potentially lead to some misleading info, and this could also potentially be used for exactly the opposite purpose that it was intended for.....

that too. It sounds like an innovative idea in some respects, but overall, it's CuCkOooooo!

[bigpoppanils]

the only thing i can compare this to is the Cat-Bond market, but the purposes of that market are much different.

its not a bad idea, but given the damage that terrorism does, betting on its occurances is tasteless

[PinkFloyd40]

Originally posted by breakbeatz2

you're also from Stern right? did you graduate already?

about the idea, its definitely ingenious, but you gotta admit that it could potentially lead to some misleading info, and this could also potentially be used for exactly the opposite purpose that it was intended for.....

werd.. graduated in may you?

did you have something specific in mind in regards to the potential misuses? or just isolating it as a possiblity?

[PinkFloyd40]

Originally posted by gmccookny

That's what i don't like... that it's rooted on making money.

guess you missed this...

"Contracts will expire quarterly and extend a year and a half into the future. Each contract would be fully valued at $1 — the payoff for an accurate prediction."

[georgym]

Originally posted by PFloyd40

guess you missed this...

"Contracts will expire quarterly and extend a year and a half into the future. Each contract would be fully valued at $1 — the payoff for an accurate prediction."

OK. But how many contracts can each person buy? one?

[PinkFloyd40]

Originally posted by gmccookny

To quote Democratic Senator Ron Wyden and Byron Dorgan: "Surely such a threat should be met with intelligence gathering of the highest quality--not putting the question to individual betting on an internet website.

also,

Dorgan and Wyden are way off here... using market mechanisms to come to a "fair value" is the single best way to incorporate all information possible on a subject... and the fact that the market would be limited to intelligence experts only further compounds its validity...

[PinkFloyd40]

Originally posted by gmccookny

OK. But how many contracts can each person buy? one?

they're given $100 to use.. and its not any normal person who can participate in the "market".. it would be established for use only by experts in the intelligence field...

as phuturephunk stated, the media puts a spin on this and immediately it becomes about making money when in fact its nothing like that at all...

[PinkFloyd40]

oh well so much for that idea.... couldnt' have been more right PP, not that i ever doubted what you said anyway..

---------------------------------------------------------------------

Amid furor, Pentagon kills terrorism futures market

Boxer calls program 'very sick'

Tuesday, July 29, 2003 Posted: 5:18 PM EDT (2118 GMT)

Deputy Defense Secretary Paul Wolfowitz faced tough questions from lawmakers about the program.

WASHINGTON (CNN) -- Facing an outcry on Capitol Hill, the Pentagon on Tuesday killed a program that would have had investors betting on the likelihood of terrorist attacks and assassinations.

"It's going to be terminated," Deputy Defense Secretary Paul Wolfowitz told members of the Senate Foreign Relations Committee, where he testified about the reconstruction effort in Iraq.

But criticism about the controversial Pentagon program -- brought to light Monday by Democratic senators -- dominated part of that hearing and others on Capitol Hill.

Wolfowitz, answering a question about the program from Sen. Barbara Boxer, D-California, defended the Pentagon's Defense Advanced Research Projects Agency (DARPA), which created the program and set up a Web site describing it.

"The agency that does it is brilliantly imaginative in places where we want them to be imaginative," he said. "It sounds like maybe they got too imaginative in this area."

"There is something very sick about it," a clearly angry Boxer said, adding that those responsible should be fired.

Wolfowitz said he'd only learned about the program Tuesday morning and added that the department will "find out exactly how this happened."

The program, called the Futures Markets Applied to Prediction (FutureMAP), would have involved investors betting small amounts of money that a particular event -- a terrorist attack or assassination -- would happen.

It has been part of the Total Information Awareness program under retired Adm. John Poindexter, a prominent figure in the Iran-Contra scandal during the Reagan administration.

His current boss, DARPA director Anthony Tether, was asked whether Poindexter would keep his job. "I don't see why not," he said as he left meetings on Capitol Hill.

Republicans moved quickly to distance themselves from the program, which was supposed to start Friday.

"We're going to recommend to the secretary of defense not to use such funds as he has available ... to implement the initial stages of this program," said Sen. John Warner, R-Virginia, chairman of the Senate Armed Service Committee.

"I just got off the phone with the head of DARPA, and we mutually agreed that this thing should be stopped," Warner said at a hearing on military promotions.

Tether agreed. When reporters asked him later whether the program was dead, he replied, "Oh yes, absolutely."

Before the Pentagon pulled the plug on the program, it generated fierce criticism, particularly from Democrats.

Democratic Sens. Byron Dorgan, left, and Ron Wyden talk about the controversial program at a Capitol Hill news conference on Monday.

"I couldn't believe that we would actually commit $8 million to create a Web site that would encourage investors to bet on futures involving terrorist attacks and public assassinations," Senate Minority Leader Tom Daschle, D-South Dakota, said on the Senate floor. " ... I can't believe that anybody would seriously propose that we trade in death ... How long would it be before you saw traders investing in a way that would bring about the desired result?"

Monday, Sen. Ron Wyden, D-Oregon, said, "The idea of a federal betting parlor on atrocities and terrorism is ridiculous and it's grotesque."

Sen. Byron Dorgan, D-North Dakota, called the idea "stupid."

Wyden and Dorgan brought the proposal to public attention Monday.

The ranking Democrat on the Armed Services Committee, Sen. Carl Levin of Michigan, said that as reports surfaced about the plan, "Our first reaction was that it was a hoax."

But Warner, in an exchange with Levin during the hearing, said, "There's been no effort whatsoever to make it secret. The program is modeled after a successful program, utilized by one of the nation's foremost think tanks, which while not directed toward terrorism, is directed toward analysis of other contingencies in the future, and in the community's been perceived as a fairly successful program."

In a written statement, DARPA had said FutureMAP "is exploring new ways to help analysts predict and thereby prevent the use of futures market mechanisms."

DARPA had acknowledged the program faced "a number of major technical challenges and uncertainties. Chief among these are: Can the market survive and will people continue to participate when U.S. authorities use it to prevent terrorist attacks? Can futures markets be manipulated by adversaries?"

-- CNN Producers Paul Courson and Steve Turnham contributed to this report.

[breakbeatz2]

Originally posted by PFloyd40

werd.. graduated in may you?

did you have something specific in mind in regards to the potential misuses? or just isolating it as a possiblity?

still got a year left so whatcha up to these post-stern days?

about the misuses:

well after this experimental stage, this is going to be open to non-academics, right? so then it will be much like the curent financial markets, which are far from perfect. in theory the idea is great, but in actuality, as its been demonstrated, markets are very prone to manipulation.

of course, since these markets will have limited participation and wont be open to the easily manipulated common folk then that might not be as true, but markets can still be manipulated.

all in all it could work though, and i def hope it does.

[PinkFloyd40]

Originally posted by breakbeatz2

still got a year left so whatcha up to these post-stern days?

about the misuses:

well after this experimental stage, this is going to be open to non-academics, right? so then it will be much like the curent financial markets, which are far from perfect. in theory the idea is great, but in actuality, as its been demonstrated, markets are very prone to manipulation.

of course, since these markets will have limited participation and wont be open to the easily manipulated common folk then that might not be as true, but markets can still be manipulated.

all in all it could work though, and i def hope it does.

analyst w/ a boutique IB... good luck w/ everything... hopefully by next spring the job market starts to pick up.. historically banks hiring cycle trails the business cycle, and with a pickup in the market occuring, albeit it slowly, that should be a good sign for your class coming out

as for the issue at hand... the manipulation is certainly a key factor.. but limited participation definetly would be helpign to curtail a large majority of it.. however, even if someone were to compromise the intergrity of the system, say, by somehow managing to get ahold of a large number of contracts, and then committing an atrocity to earn the return(which as already noted, would be trivial anyway w/ the contracts fully vesting at only $1) the increased price would be indicative that a terror threat it high through the high price of the contract...

of course all that is merely a hypothetical situation, and would be highly unlikely considering the only participants would be intelligence experts already at work with pentagon...

but bottomline here is, simply b/c "money' was attached here, everyone has cried how its being done in such poor taste and is unethical... well, being that the amount is so trivial, it effectively makes the petty amount so far from being significant.. its too bad too.. now a potentially great idea has been shot down w/o really ever even beign given a chance... what they should have done, was formulated an index based on the futures contract values for all the socialists out there

[georgym]

Originally posted by PFloyd40

but bottomline here is, simply b/c "money' was attached here, everyone has cried how its being done in such poor taste and is unethical... well, being that the amount is so trivial, it effectively makes the petty amount so far from being significant.. its too bad too.. now a potentially great idea has been shot down w/o really ever even beign given a chance... what they should have done, was formulated an index based on the futures contract values for all the socialists out there

But that's the thing... money is the root of all evil (sorry for the cliche .), and like the senators said: "I couldn't believe that we would actually commit $8 million to create a Web site that would encourage investors to bet on futures involving terrorist attacks and public assassinations"

It's the idea, the encouragement to "be right" on gambling on someone's death, on the toppling of a government, that is so sick and asinine.

What if some other country, say China or Russia, created a website asking for investors to gamble on how many US soldiers' lives would be lost in Iraq, or when and how President Bush would be assasinated.

You just have to turn the tables to see how ludicris this idea is.

[PinkFloyd40]

Originally posted by gmccookny

But that's the thing... money is the root of all evil (sorry for the cliche .), and like the senators said: "I couldn't believe that we would actually commit $8 million to create a Web site that would encourage investors to bet on futures involving terrorist attacks and public assassinations"

It's the idea, the encouragement to "be right" on gambling on someone's death, on the toppling of a government, that is so sick and asinine.

What if some other country, say China or Russia, created a website asking for investors to gamble on how many US soldiers' lives would be lost in Iraq, or when and how President Bush would be assasinated.

You just have to turn the tables to see how ludicris this idea is.

but its not an open market!

its not like any person can go out and start betting on atrocities.. thats not the way it would work... nor did the program propose anything along those lines.. they are intelligence experts using a market style medium to consolidate all the information they have into one "fair value" of a terrorist attack...

when companies crash, the market predicts it before its widely known.. when the economy is going into recession, the market ALWAYS predicts in advance w/ a bear market... this is just the same premise attempting to be extended toward prediciton of attacks in order to save lives not gamble... the idea is not ludcris at all.. like i said.. had they converted values of contracts into a synthetic index instead, people would not be in this kind of uproar over it.. not in the least.. but simply b/c its a market and theres a dollar value attached to it, all the damn liberals suddenly pounce on it...

as far as the hypothetical scenerio you offered, it is not analgous to the one proposed here and is at best tangential.. the pentagon was not asking ANY investors to come in.. goldman sachs would not be making a market in these contracts it was meant for the intelligence community...

[PinkFloyd40]

ok, gonna take back some of what i said, sorta

apparently into the future they would be considering letting other participants in... have a few reservations about it then.. though i definetly need to put more thought into it...

but as a market only open to intelligence community officials from all over the world, i think it would be a fantastic idea... it would theoretically be much better if anyone could particpiate IF they were doing so altruistically... unfortunately, thats easier said then done..