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Tuesday, July 29, 2003

Your Future in Futures

Another link from Joerg, this is rational expectations sent to the nth and ultimate degree. As they used to say 'whom the gods would destroy they first make mad'.

Pentagon Plans Futures Market for Events in Mideast

The U.S. military plans a worldwide on-line futures market to help it predict events in the Middle East. Traders could bet on the likelihood of events ranging from the overthrow of a government to the collapse of an economy or the assassination of Palestinian leader Yasser Arafat. Traders can register starting August 1; on-line trading would begin a month later, according to the program's Web site. Two Democratic U.S. senators say the market is a terrible idea and must be stopped. "Clearly, this is morally wrong,'' Oregon Senator Ron Wyden said. Senator Byron Dorgan of North Dakota called it ``the most Byzantine thing I have ever seen proposed by a federal agency.'' The Pentagon requested $3 million for the project in its fiscal 2004 budget. The Senate said no; the House said yes. The budget is now before a conference committee of both chambers. If the Pentagon doesn't shut it down, ``we have to find a way in conference,'' Dorgan said. ``This is a hare-brained scheme.'' The Policy Analysis Market is part of a Pentagon effort to anticipate terrorist attacks. The Total Information Awareness Program was restructured this year after Wyden persuaded Congress to cut its funding over concerns over privacy issues. The market is to be managed by the Pentagon's Defense Advanced Research Projects Agency, or DARPA. DARPA spokesman John Jennings wasn't immediately available for comment. The senators said their information came from the market's Web site. The site doesn't make clear the extent to which traders, geopolitical analysts or ordinary citizens actually ``bet,'' the mechanics of payment if any, and how the Pentagon plans to use the information.

"How would you feel if you were the king of Jordan and learned that the U.S. Department of Defense was creating a futures market in whether you're going to be overthrown,'' said Dorgan, a member of the Senate Appropriations Committee. The Web site for the Policy Analysis Market cites ``Overthrow of Jordanian Monarchy'' as an example of the sort of event traders might speculate on. Others include Arafat's assassination and the likelihood of a North Korea missile attack on the U.S. "PAM will focus on the economic, civil, and military futures of Egypt, Jordan, Iran, Iraq, Israel, Saudi Arabia, Syria, and Turkey and the impact of U.S. involvement with each,'' according to the ``Concept Overview'' on its Web site. "The issues represented by PAM contracts may be interrelated'' and traders can ``structure combinations of futures contracts,'' it says. The market ``will be active and accessible 24/7 and should prove as engaging as it is informative.''

The actual wagering will be conducted through a FutureMap program that provides the Defense Department ``with market-based techniques for avoiding surprise and predicting future events,'' DARPA said in a May 20 report to Congress. The intent is to ``answer predictive questions such as `Will terrorists attack Israel with bio-weapons in the next year?''' DARPA said. ``To answer this question, FutureMap would aggregate information from a variety of experts.'' The trick is to combine the disparate answers into a model useful for policy analysts, and that's where the "market'' approach comes in, DARPA said. The new approach is to set up, as it were, a `market' in two kinds of futures contracts -- one pays $1 if an attack takes place; the other pays $1 if there is no attack,'' DARPA said. "Prices and spreads signal probabilities and confidence,'' it said. ``Since markets provide incentives for good judgment and self-selection, the market will effectively aggregate information among knowledgeable participants,'' DARPA said. "This approach has proven successful in predictions concerning elections, monetary policy decisions and movie box office receipts -- DARPA is investigating its success in defense- related areas,'' it said. Dorgan didn't see it that way. ``Futures markets almost always relate to a commodity in this country,'' he said. ``There's not a commodity here. It's wagering.'' Wyden, a member of the Senate Intelligence Committee, was scornful of the project. "They have this notion about the predictive capabilities of intelligence,'' he said. "We think it's absurd; we think when you look at what happened in 9/11. You ought to go on the basis of real evidence from the real world. They have these ideas about markets and predictive capabilities which are more of fantasy land.''
Source: Bloomberg

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