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I love free markets

The Pentagon funded research agency DARPA are launching something called the Policy Analysis Market (PAM) which is in its own words…

    A Market in the Futures of the Middle East..

and will provide…
    insight into the interactions among Middle Eastern and U.S. interests and policy decisions.

This is done by letting you trade…
    on data indices that track economic health, civil stability, military disposition, and U.S. economic & military involvement in Egypt, Iran, Iraq, Israel, Jordan, Saudi Arabia, Syria, and Turkey.

…as well as other contracts. There has been some opposition to the idea. Senators Ron Wyden of Oregon and Byron Dorgan of North Dakota have urged the Pentagon to drop the idea stating that…
    The idea of a federal betting parlour on atrocities and terrorism is ridiculous and it’s grotesque.

and …
    useless, offensive and unbelievably stupid.

Trading begins October 1st

27 comments to I love free markets

  • Johnathan Pearce

    Interesting, though I honestly cannot say whether this will work. The movement of the oil price is often quite well correlated to tensions in the MidEast, of course.

    I would imagine this new market is tailor made for any budding Gordon Gekkos. As Michael Douglas says in Wall Street: “If you want a friend, buy a dog.”

  • Andrew X

    Get a clue, Senators. Terrorism is “grotesque”. Virtually ANY reasonsably moral tatic used in fighting or predicting it is not.

    Shut up and let your protectors do their damn jobs.

  • Scenario:

    “Big Betting Plunge By X on Y getting attacked.”

    “Increased Security at Y foils plot”

    “X helping police with their inquiries”

    “X tells all : W and Z sent to Gitmo.”

    There’s bound to be some stupid enough to let their Greed outweigh their Caution.

  • T. Hartin

    This is a great idea. No one has ever come up with a better mechanism than the markets for predicting events. This is just an attempt to tie a nice market dynamic of assembling and weighting diffuse information to the hardest part of the intel business. It will be fascinating to see if a bunch of average joes with no access to classified information can beat the pros in the bureaucracy.

    Count on the Senators to stick a spoke in the wheel of innovation. After all, this is a market mechanism (of which they demonstrate their ignorance by likening it to a betting parlor), and doesn’t involve giving their dependents other people’s money. No wonder the Senators hate it.

  • Edmund Burke

    “The idea of a federal betting parlour on atrocities and terrorism is ridiculous and it’s grotesque,.

    and

    useless, offensive and unbelievably stupid.”

    Those Senators are damn right. Why is the Federal Government involved in running this interesting idea.

  • Kelli

    I’m not opposed to this idea, but wonder how many people will enter the market when it is quite possibly an elaborate trap for terrorist-cum-speculators. If you bet the house (and win, lucky you) on a suicide bombing on the NY subway or an anthrax attack in Tel Aviv, is there likely to be a knock on your door the next day asking how you came by your information? Perhaps not, but I suspect a page would be added to a file somewhere in the Homeland Security Dept or elsewhere in DC and that is creepy enough to keep me out of the action.

  • Andy

    Yawn. Of course, no one is bothering to note that this is all “funny money” – no one is going to make real wampum playing this game. It’s a typical DARPA thing – play a game and see what happens. The hysteria (and ignoring of this fact) is very funny to watch in action. See CNN’s take on this.

    But don’t take my word for it, check out the PAM website for the straight scoop. Nowhere does it say anyone will make real money. (it does say that people will profit, but my bet is that this is just a bunch of engineers and market wonks who don’t know how to write stuff smoothly so that stupid senators don’t overreact)

  • Andy

    no one is bothering to note that this is all “funny money”

    I don’t think you are right about this, the site says

    because traders who are registered with PAM will use their money to acquire contracts

    and one of the registration criteria is

    Deposit of funds into the registrant’s PAM trading account

  • dragoon

    Game over, man.

    It’s been closed down due to complaints. What a shame. DARPA seems to be pissing off a lot of people nowadays. That anger should have been saved for the TIA project.

  • BigFire

    It’s a shame they shut down the program before it got started. Navy’s Advance Research Project uses similiar method to track down missing nukes off the coast of Spain (B52 crashed in 1966) and recover USS Scorpion (1968). In both instance, the betting method beats the alternative method. (In the case of the missing nuke, the opponent is Soviet Union, who’s more than a tad interested in getting their hand on our nukes).

  • Aside from getting sent to Gitmo yourself for a successful prediction, wouldn’t it be to your advantage to obstruct intelligence on a contract you own, or to stir up public fear of an attack that won’t happen in order to boost the price of your futures, mucking up the intellegence system with speculative chat meant to boost futures prices?

  • George Peery

    Poor Darpa. Good thing no one was paying them any mind thirty years ago when they developed the Internet.

  • John J. Coupal

    If Ron Wyden and Byron Dorgan are opposed to the DARPA plan, there has got to be potential to the DARPA plan worth pursuing.

    Wyden-Dorgan are a proven negative-feedback-loop.

  • Cydonia

    I don’t see why a new market is needed. As Johnathan says, there are already markets which track the Middle East. If you want to bet on more terrorism, just go long on oil or on the major indices in the area (e.g. TASE). If you want to bet against, just go short.

  • Cydonia

    Oops sorry. Don’t go long on TASE if you expect more terrorism, or you’ll lose a stack of cash. Lucky I’m not a financial advisor :-)

  • There seem to be many misconceptions about this.

    First of all, it is not a “betting parlor” – it is a futures market. If you are good a predicting certain kinds of events, you can win on skill, not chance.

    Second, these kinds of markets have been used for some time. I have participated in University of Iowa’s markety on political outcomes. It is usually a better and earlier predictor of election results than polls or experts.

    Third, they don’t let you use enough money to make it worth your while to actually cause events that effect the market. There is enough money to keep people from “spamming” the market (and other protections), but not enough to make you rich when you win.

    This was a smart idea by a smart outfit, DARPA… you know, those guys who brought us the Internet?

    Oh, and for the person who mentioned TIA in a negative way. You really should find out what TIA actually is. It’s online and easy to find with google. If you did that, you would discover that THIS PROJECT IS PART OF TIA!!!

    TIA is a lot more than data mining.

    DARPA generally doesn’t put out idiotic ideas. Those attacking this should at least consider that before bloviating!

    See this for more on the subject, and links to actual information about it.

  • Thon Brocket

    There’s a good take on it here

  • Joe Lieberman

    Funny – I thought Al Gore invented the internet, not DARPA.

  • AmeKes

    It is a shame that DARPA will have to drop this plan, without even giving it a try. It is a bit grotesque and morbid, but if it works that would be far less grotesques and morbid then the pictures of dead and maimed innocent victims . DARPA is charged with pushing the envelope in trying to find ways to protect us from terrorists, and that is what they did. When you are on the cutting edge , failures, ideas not amicable to everyone are par for the course. DARPA needs to be given more freedom to do it’s job with out all this micro-management. Who knows what we could have reaped from this project.

    When I look out at the myriad of pundits, Middle East experts, defense experts, and the like handing out views, predictions, etc. on what is going on in the middle east, there is no way to tell which ones are being objective, or have an intuitive understanding. We are forced to make judgments based on their prestige, academic qualifications, and the other like. Often we make our decisions based on how well they tug our political and cultural sensibilities. We have not stats on them, nothing to quantify the accuracy and objectiveness of their opinions. This plan would make them “put their money where their mouth is”. Then we would have the numbers. Something tangible to go on. Like if Pipes walks away with 100,000 dollars and Said, and Fisk walk away loosing money, then we would have a better idea of who’s opinion to follow.

    Any one want to place bets on whether someone in the private sector picks this up?? =:)

    Michael

  • Edmund Burke

    Good news, the free market wins over the government. An Irish firm offers PTP spread betting on things like the level of homeland security at a future date. Check them out here

  • Pearce,

    I think if you look at the source article, you will find that the Iraqi family would have been released anyway. The exact phrase, I think, was “released anyway in due course”. So the kidnapping incident was really more in the nature of psychological war. Ruse de guerre. There was no suggestion that the family would be actually detained. So there is no point arguing the principle in the absence of the fact.

  • Johnathan

    Wretchard, well, if you are right, I will stand corrected, but the way the story read, it appeared as though there was a threat to detain the family and use such a threat to make the guy co-operate. That is what made me queasy.

    Looks like you meant to comment on a different thread, BTW.

  • Omnibus Bill

    Hmmm… y’all are pissed when the government comes up with intrusive ways to try and outwit terrorists; y’all are pissed when the government comes up with non-intrusive, market-driven ways to try and outwit terrorists.

    Well?

    You got some suggestions?

    [crickets chirping]

    The futures market based on middle eastern political and economic outcomes sounded like a good idea. It worked on the Hayekian principle that while individual people can’t get a handle on all of society, though large groups somehow navigate themselves to a good method of handling things – without conscious effort. That’s why markets are often a good predictor of social events. No actor in the market has perfect knowledge, but all actors in concert have something like perfect knowledge — most of the time, the market will get the right result, regardless of how screwy individual investors behave. A futures market in middle eastern outcomes is just one way of leveraging the information advantages of thousands of investors, and trying to come up with an average. The price of futures markets – derivatives based on middle eastern events – would reflect when events are making a cross section of folks nervous.

    As for the trap question – if no terrorists are in the market, then it would be a very nearly perfect market, if large enough; few people would have an information advantage based on unfair insider information. If some terrorist also happened to be in the market and tried to make a killing (economically and literally speaking) he would be quickly detected by his unusual, counter-market activities. The securities regulators employ sophisticated analysis to determine, based solely on sales and purchase patterns, if there is any insider trading going on.

    Either way, it would have been a win-win.

  • Omnibus Bill

    Hmmm… y’all are pissed when the government comes up with intrusive ways to try and outwit terrorists; y’all are pissed when the government comes up with non-intrusive, market-driven ways to try and outwit terrorists.

    Well?

    You got some suggestions?

    [crickets chirping]

    The futures market based on middle eastern political and economic outcomes sounded like a good idea. It worked on the Hayekian principle that while individual people can’t get a handle on all of society, though large groups somehow navigate themselves to a good method of handling things – without conscious effort. That’s why markets are often a good predictor of social events. No actor in the market has perfect knowledge, but all actors in concert have something like perfect knowledge — most of the time, the market will get the right result, regardless of how screwy individual investors behave. A futures market in middle eastern outcomes is just one way of leveraging the information advantages of thousands of investors, and trying to come up with an average. The price of futures markets – derivatives based on middle eastern events – would reflect when events are making a cross section of folks nervous.

    As for the trap question – if no terrorists are in the market, then it would be a very nearly perfect market, if large enough; few people would have an information advantage based on unfair insider information. If some terrorist also happened to be in the market and tried to make a killing (economically and literally speaking) he would be quickly detected by his unusual, counter-market activities. The securities regulators employ sophisticated analysis to determine, based solely on sales and purchase patterns, if there is any insider trading going on.

    Oh yeah, and worse comes to worse, the market is useless as a predictor, DARPA could still get to keep brokerage fees.

    It would have been a win-win-win situation.

  • I was a futures and options trader myself in the 1980s.

    About fifteen years I imagined a slightly better version of this [not for Middle Eastern terrorism, though] through local-currency instruments.

    Politically, a little clumsy – they should have let someone in Chicago “come up” with the idea independently. But of course it would work. Lots of similar instruments already trade openly.

    I’d like to hear more about the version that helped trace lost nukes in the Atlantic in the 60s? BigFire?

  • Omnibus Bill

    I’m not so sure about that Mark. Hard to say who would raise the public’s ire worse – pardoned Iran-Contra figure Admiral Poindexter, or some guy off the CBOT floor in a blinding orange blazer, with a bit of mustard off his Nathan’s Famous spilled down the front…

  • A

    Rare are the days when I agree with the Demi-crats but YES, this is an “unbelievably stupid” idea.

    I work as a derivative trader in the City and first when I caught the headline article on bloomberg wires I thought someone was taking the piss.

    You guys can talk all bout free markets and so so, but that’s all theoretical – in practice free markets are not really that free and YES shock horror , big institutions and speculators DO manipulate prices. Now the Guardianistas might call for the govi-ment to regulate and tax everything, but that would be even dumber than suffer an occasional volatility and “irrational” price moves. In long term, yes, the markets revert to the mean…. but that’s a subject for another debate.

    Oh, the “terrorism” futures – and this is an idea Pentagon asked $10m for – is totally stupid. Futures markets need something TANGIBLE for the underlying… suicide bombers or hijackings will not do. Where’s the natural producers that use the product to hedge? Where’s the liquidity? How do you put a moneytary figure to the damage of a suicide bombing in Israel? If you cannot quantify and measure the underlying there will NEVER be a feasible market for the product.

    Airlines industry ? Go long Tnote futures then if you’re afraid of terrorist attacks. Stop wasting money lobbying harebrained Pentagon types…