July 29, 2003

THE PENTAGON WANTS TO USE A FUTURES MARKET to predict terror attacks. Although this is getting a lot of criticism (mostly from members of Congress who, I suspect, couldn’t accurately describe the operation of existing futures markets) I think it’s an excellent example of creative thinking, and the Pentagon deserves to be congratulated for it. As I’ve suggested before (here, here, and especially here) the diffuse, fast-moving threat of terrorism requires a diffuse, fast-moving response. And this sounds like a very plausible way of recruiting a lot of minds in the service of anti-terrorism.

Josh Chafetz agrees:

A futures market in terrorist attacks, while it sounds grisly, may help us to aggregate diffuse knowledge in a way that will prove superior to expert knowledge. It also may not, but it seems to me that it’s worth a try. At the very least, if we’re going to demand that the government get creative in fighting terror, we shouldn’t be so quick to criticize when it does just that.


UPDATE: Reader Fred Butzen emails:

The story about the Pentgon’s “terrorism market” clearly is an extension of Iowa Electronic Markets, which has been run for years by the University of Iowa’s Tippett School of Business. Here’s a link to the Iowa Information Market’s web site:


In brief, the IEM lets persons place bets on the likelihood of given events’ happening; for example, people could bet on the likelihood that Saddam Hussein will survive this year, or who will win the next presidential election. The collective expertise of the participants has proven to be extremely useful in predicting events.

The notion that the dim-bulbs in Congress and the media should attack such a useful and proven idea as the Pentagon’s is utterly absurd.

This is absolutely right. Whether or not the Pentagon’s idea is a good one depends on details I don’t know about. But the lame criticism makes clear that the critics are — as usual — clueless on the subject.

ANOTHER UPDATE: Mitch Berg points out that this approach has worked in the past.

YET ANOTHER UPDATE: Defense Tech has more on this. So does ChicagoBoyz, which also points to this Martin Devon post. Martin is particularly hard on our elected representatives:

I was pleasantly surprised to see a bit of “out of the box” thinking on the government’s part about how to evaluate the likelyhood of terror threats. Doesn’t it just figure that a couple of maroons from the senate would complain so that they can be seen “taking the high ground?” I’d pay them the compliment of believing that they wrote the complaint for cynical reasons, but just watching them on TV is enough to lead one to conclude that they really are stupid enough to be making an issue of this on principle.

An InstaPundit reader who is too smart to be in Congress emails with a more meaningful criticism: the futures market won’t identify “unknown unknowns,” since the betting — as with ordinary futures markets — must take place within the context of standard “products.”

This is true as far as it goes, but (1) You could provide incentives to come up with new forecasts; and (2) This is only one part, obviously, of a more general approach to thinking about and predicting terror, not the whole thing. The biggest weakness to my mind is that i fthe results are public, terrorists might deliberately choose strategies that are deemed unlikely by the “market.” But, of course, the market could also be configured as a trap, so that could work both ways.

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