An interesting perspective on the latest DARPA brouhaha

[Dave Farber <dave () farber net>]

> Date: Thu, 31 Jul 2003 11:08:19 -0400
> From: Ted Dolotta <Ted () Dolotta ORG>
>
> Dave,
>
> For IP -- a cooler perspective than the previous reports
> on this project.  Does not negate the fact that Pointdexter
> is -- to put it diplomatically -- not too well qualified
> for the job he currently holds ...
>
> Ted Dolotta
>
> =========================================================
>
> A Good Idea With Bad Press
>
> July 31, 2003
> By HAL R. VARIAN
>
> The Pentagon-sponsored futures market in terrorism
> indicators was announced and squashed in all of two days.
> Too bad. It was a good idea, killed by terrible public
> relations.
>
> Consider the problem that intelligence agencies face. They
> have to consider the likelihood of various destabilizing
> events - like assassinations or terrorist attacks. That's a
> major part of their job; there's no way around it.
>
> In assessing such likelihoods they draw on expert opinion,
> but they also make considerable use of market data - oil
> price futures, currency exchange rates and the like - to
> see how market traders assess risks of political
> instability.
>
> Markets do an awfully good job of forecasting many events
> and trends. The futures price for oil is about the best
> predictor available for this critical commodity, and it is
> widely used for forecasting by both political and economic
> analysts.
>
> The question is whether speculative markets would work well
> for other policy-relevant events.
>
> There is lots of evidence that they do. The Iowa Electronic
> Markets, www.biz.uiowa .edu/iem/, has been predicting
> election results for 12 years using a system very much like
> the one that the Defense Advanced Research Projects Agency
> at the Pentagon proposed.
>
> One of the markets the Iowa exchange offered was in vote
> shares: what fraction of the vote went to the Democratic or
> Republican candidate. It is particularly easy to assess the
> outcome of such a market and to compare it with alternative
> forecasts, like public opinion polls.
>
> As it turns out, these political stock markets provided
> somewhat better forecasts than polls right before the
> election - and they provide much better (and less volatile)
> forecasts several months before the elections. Thus,
> markets do best exactly where the public opinion polls and
> expert opinion polls are weakest.
>
> This is not an isolated example. Similar markets have been
> organized to predict shifts in Federal Reserve monetary
> policy, the outcome of political conventions and sales of
> consumer products. The results are that markets typically
> perform at least as well, and generally better, than
> feasible alternatives, and they are much cheaper to
> organize.
>
> An online betting site based in Ireland, tradesports.com,
> is currently offering markets in "Kobe Bryant to be found
> guilty," "Next Supreme Court justice to leave bench," and
> "Gray Davis to be California governor on Dec. 31, 2003."
> Those concerned about the outcome of these events might be
> well advised to take a look at the odds, which reflect
> bettors' sentiments.
>
> There is good reason to believe that a market set up to
> forecast the sort of political instability that leads to
> terrorism might work well, too. At least, there is enough
> reason to warrant an experiment, given the high payoff to
> having better forecasts of these events.
>
> This is why the Pentagon thought it was important to
> finance research in this area.
>
> The objections raised by politicians and opinion writers
> were generally based on misunderstandings of what was
> actually proposed.
>
> Take the claim that terrorists could speculate in their own
> future activities and reap a windfall. First, the maximum
> gain from a trade was restricted to less than $100. This
> would not be of much help to terrorists' fund-raising
> activities.
>
> Second, the market would have been monitored for evidence
> of insider trading. If someone managed to circumvent the
> trading limits and made a significant amount of money
> speculating on a terrorist attack, you could be sure the
> C.I.A. would be right behind the I.R.S. in investigating.
>
> If the federal authorities were alert enough to find enough
> evidence to indict Martha Stewart, why would one think that
> Osama bin Laden would be able to avoid detection?
>
> There were also objections that the auctions were immoral.
>
>
> Senator Byron L. Dorgan, a Democrat of North Dakota, asked
> what would happen if another country set up a betting
> parlor where people wagered on the assassination of an
> American political figure.
>
> I'm sure he is right that there would be public outrage.
> But let's turn the question around: If such a market were
> put in place, should the Secret Service monitor it? If
> there were an assassination attempt, should the authorities
> look for suspicious prior trading activity? And the most
> important question of all: If the market indicated that the
> probability of an assassination attempt went up, should the
> target take extra care? If you were a potential target,
> wouldn't you want the best possible forecasts of possible
> attempts on your life? I would.
>
> I would also prefer that such forecasts not be quite so
> public. A private market in the probability of specific
> assassination attempts - say within an expert community
> like the C.I.A. - could make sense, assuming, of course,
> that it provided useful information.
>
> Would Mr. Dorgan object to such an internal market as a way
> of aggregating expert opinion? I hope not.
>
> In any event, assassination futures were not among the
> planned securities, contrary to most press reports. The
> market design allowed traders to propose securities in
> various events, and the Policy Analysis Market Web site
> speculated that some traders might propose to add
> securities in assassinations. That off-the-cuff speculative
> remark had fatal consequences, alas.
>
> The securities that were an essential part of the auction
> design were indexes of political, economic and military
> activity. The most useful such market would probably have
> been a market for futures in a "political instability
> index," a weighted average of various political indicators,
> like the number of mass demonstrations, unemployment
> levels, arrests - and, yes, assassination attempts. (Type
> "political instability index" into Google for some
> examples.)
>
> If the markets had been pitched in this way, I doubt that
> there would have been many objections raised.
>
> But instead politicians, reporters and editorial writers
> mistakenly jumped onto "assassination and terrorist attack
> futures" as a fundamental part of the market design.
>
> Given the public outcry, it seems clear that there will not
> be a public market in assassination futures anytime soon.
> But there is no reason not to have a futures market in
> political, social and economic indicators, which is what
> the Pentagon's project was actually about.
>
> We desperately need better ways to forecast political
> instability, and the Policy Analysis Market had significant
> promise. It's sad to see poor public relations torpedo a
> potentially important tool for intelligence analysis.
>
> http://www.nytimes.com/2003/07/31/business/31SCEN.html?ex=1060662577&ei=1&en=7ea
> 07106348f3671
>
> Copyright 2003 The New York Times Company

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