July 30, 2003

Terrorism Market

An electronic market where traders would buy and sell futures on economic, civil, and military events was a great idea. Too bad the Pentagon caved in to some Congressional pressure.

The premise was to use markets to gather dispersed information into a form policy makers and strategists could use to base their anti-terrorism plans. Sounds goofy? How could millions of people possibly know if Jordan's monarchy was about to fall in a coup? Participants in the market would presumably read newspapers, books, websites, watch television, or even talk with people who have insider information. With the explosion of media sources no one person can possibly read and listen to everything. People will following little snippets of the whole story. The market comes in to give people an incentive to make their educated guesses profitable. If there were rumblings within the Palestinian Authority, Policy Analysis Market (PAM) activity in an Arafat assassination future could catch policy makers' attention. Just like CNBC reports talk to corporate officials when their stocks make unexpected moves, officials and the media would get curious over futures activity.

F.A. Hayek wrote on how the market allows dispersed information to be used to generate economic activity. PAM would have served a similar role in terrorism analysis. Hayek writes on the economy, but it can be applied in our current situation:

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequesntly contradictory knowledge which all the separate individuals possess.

In a press release, Sen. Byron Dorgan (D-ND) said, "We need to focus our resources on responsible intelligence gathering, on real terrorist threats." That is what PAM would have done. With the enourmous quantity of data flooding our intelligence agencies officials need some way to distill it. Supercomputers and lots of human analysts are one way, and using dispersed knowledge and the profit motive is another.

Should U.S. policy be determined only by the results of an events market? No, what PAM could have offered was an innovative mechanism for evaluating global threats. Since humans operate in markets and they're fallible market information won't be perfect. What PAM would have done process information human eyes might never see.

How an events market can guide policy makers toward the correct decisions is explained by Hayek:

The most significant fact about this system [the market] is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order ot adjust their activities to changes of which they may never know more than is reflected in the price movement.

Democrats and Bush bashers went ga-ga over PAM. Kris Lofgren's freaking out. Sen. Ron Wyden (D-OR) called the events market idea "wasteful" and "repugnant."

Since people already profit off weather futures and Presidential elections a terrorist events market doesn't seem that bizarre. But it does to people who don't appreciate the information-gathering abilities of markets.

Wyden and Dorgan won. The PAM website is down and with it went an innovative way to predict future crises.

"Pentagon Scraps Terror Futures Market"

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Not surprisingly, Glenn Reynolds posted on this hours ago and has a bunch of updates. Then there is Matthew's post at A Fearful Symmetry.

Ronald Bailey thinks the market was a good idea. He points out that Tradesports.com already runs an "events market" like PAM.

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UPDATE: Tyler Cowen compares PAM to Las Vegas odds-makers.

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UPDATE II: John Cole at Balloon Juice calls the PAM cave-in "disgusting."