http://slate.msn.com/id/2086315/
“The Pentagon scraps its startling plan for a terrorism futures market.” “Startling” is about right—politically, there was no way the program could survive. Even Paul Wolfowitz declared: “I share your shock…”
Gross says that though “on its face, the market is not a preposterous idea,” it would ultimately fail because “many of the figures who would have driven the pricing of PAM securities [e.g. Arafat, Bin Laden, suicide bombers] are not what international relations types refer to as ‘rational actors.’” There are two responses to this argument.
First, markets are much better at taking uncertainty into account than he suggests. Though the balance sheets of publicly-traded companies are (thanks to SEC rules, etc.) more open than, say, Hezbollah’s, a company’s value depends on much more than this. Among other things, investors have to be able to predict whether a particular product (Tablet PCs, the new Ford Falcon) or drug (cure for cancer, AIDS) will or won’t succeed in order to accurately value a company—and in this they would seem to have about as much information at their disposal as those predicting the timing and form of terror attacks.
Second, the business of predicting terror attacks is clearly not impossible (e.g. suicide attacks are more likely in Israel than Australia): and making these sorts of predictions is, in fact, exactly what intelligence agencies are supposed to do. Why not force them to quantify the strength of their beliefs by “selling” them in a market? What is the probability that Iraq tried to acquire yellowcake from Africa? If the only odds the CIA will accept are those that imply a probability of less than 5%, then maybe they aren’t so sure after all.
A market would allow decision-makers to separate the experts from the charlatans: if a supposed expert is continually losing money, then perhaps their predictions aren’t so hot after all. (Though in actual fact—if the market ever did run—decision-makers would most likely take their leads from the probabilities the market itself assigned, rather than the predictions of any one analyst.) To some extent, a market would also reduce the influence of ideological biases in the same way that footy tipsters, if they want to win, sometimes have to tip against their own team. Wishful thinking won’t do when your reputation is on the line. James Surowiecki, in an article published in March, put it like this: “Decision markets also skirt the political and personal issues that so often clog the flow of information within organizations. Because people are rewarded only for being right, they have no incentive to hide information, pursue agendas, or go along with the crowd.”