« CA's worker's comp fiasco | Home | Can Anaheim lead the way? »
July 29, 2003
Give terrorism futures a chance
If there was ever a clear example of why it's so difficult to innovate in government, it's the example of the Darpa's ill-fated idea for a futures market on terrorism (see WSJ.com - Pentagon Retreats From Terror Futures.) Excerpt:
Republican reaction to the program Tuesday was as fierce as the response from Democrats when they disclosed it at a Monday news conference. Some lawmakers said they had known about it but didn't realize money was at stake. Senate Majority Leader Bill Frist (R., Tenn.) ordered that funding for the program be cut off. "I can't disagree more with the approach," said Sen. Pat Roberts (R., Kan.), chairman of an armed-services subcommittee. He said his panel would seek to hold hearings to "fully explore" how the idea came about.The Pentagon's aim was to help create an alternative way of anticipating events in one of the world's most volatile regions. Middle East specialists would buy and sell futures contracts from self-financed accounts, and defense officials would monitor their trading patterns to glean insights into the likelihood of certain events.
Darpa and the defense department are charged with coming up with innovative ways of providing for our national security. The problems with centrally run, heavily bureaucratic intelligence regimes are almost all we read in the papers these days and yet here is an innovative approach, based on market principles and it is roundly condemned. Why? Certainly not because of any thoughtful critique after careful study of the costs and benefits. (And there may be some reasonable critiques of the system, though thse aren't the ones made by the senators.) No. The problem with this is that it sounds morbid--imagine people profiting from betting on the likelihood of terrorism!--no politician could ever support it on optics alone.
But this clever idea is no more radical--only more straight forward--of things we all to everyday. We all make our judgments about the future--considering small trends and large--and make our bets. Certainly it was the expectation of future attacks, among other factors, that kept markets so weak after 9/11. Much of that fear was misplaced, it turns out, and wouldn't it have been nice to be able to more accurately judge the likelihood of future terrorist attacks?
We all make bets about things we hope won't come to pass. Any of you estate plan? Ever bought life insurance? Medical insurance? Heck, any insurance?
In addition to potentially being a useful source of intelligence on the likelihood of attacks, such a futures market could have economic benefits. If I am in the airline or travel industry (or invest in those industries) I may wish to hedge against a terrorist attack and so find futures a useful index.
The good news is that, while there may have been justification for this being a Darpa project, it can clearly be a privately run service (unless the politicians decide they want more air time in banning this sort of activity.) The private sector will most probably succeed where the government has failed. I can't think of anything more wonderful than competition to our woeful intelligence agencies from the private sector--tapping, as markets will do, the power of dispersed data and complex systems.
It may be politically incorrect to be so straightforward about assessing and betting on the risks we face as a society, but should that be what we are striving for? It may be uncomfortable and perhaps unseemly to bet on tragedy, but the discomfort is cause by the tragedy itself—and denial false comfort.
Coda: I think the fear that terrorists will now have a way to profit from their deeds is overblown. Firstly, they can already do this in a variety of ways—by shorting airline stocks for example. Secondly, if indeed terrorists attempt to profit from terror attacks by buying up (or selling—not sure how the mechanics will work) futures, well then the market will work: that will provide an indicator that a terrorist attempt is more likely. We should be so fortunate for terrorists to signal to the market what their intentions are—and we’d have a paper trail right to the culprits.
The reason this is a bad idea is that it would expose the incompetence of the CIA, FBI, and DoHS for their intelligence gathering activities.
Ross Mayfield-Gray suggested that we model a terrorist scenario in QuakeIII with rewards given to 'clans' who use the most advanced and successful attack scenarios modeled against real world scenarios.
One of these is going to take off one day and I think it would be a good thing.
Wait until infoanarchy takes over and someone sets up their own futures market without government approval. Say the British government decided to do this....
As Chris points out the idea of a futures market that securitizes events that might involve death or suffering is not, a priori, worse than health insurance, or a variety of other futures markets already in existence. We bet and hedge in such markets every day.
The real and most intelligent objection to a terrorism futures market is that it confuses the different functions and methods of intelligence gathering and the markets.
The most likely way that a speculator, not himself a terrorist or an associate of terrorists, would "win" in the terror pools would be by using classified information gathered through human or electronic intelligence by government or military agencies. If the futures market was public, we would be revealing what American intelligence professionals call "methods and capabilities" and British intelligence officers call "the shopping list." That is, we would be revealing what we know. If the market were public, and we knew who was betting what, it would be an even more grievious abuse of secret intelligence.
As for the ability of terrorists, or the associates of terrorists, to bet on such markets, the problem is not, as Chris says, that they might benefit from their bets (indeed they can already do so), but we would be making public information that should properly be secret.
It's an incredibly stupid idea, that could only be forwarded by people with an almost religious devotion to the principle of market-oriented solutions--and of the superiority of the collective wisdom of markets over professional bureaucrats and statesmen.
Defending it, also, shows an extraordinarily deaf ear to how most Americans, not themselves ideologically committed to the market, regard the operations of a free market: with caution, with reservations.
In short, intelligence gathering is one of the best examples of a human activity that is almost always distorted by market economics.