Hedge Your Bets


New at Reason: Ron Bailey explains why the terrorist futures market was actually a pretty good idea.


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  1. Very good piece .. any ideas why the Republicans let this one go down without a fight?

  2. Rex asked:

    Dumping all your United Airlines stock doesn’t encourage crashing 747s into office buildings, does it?

    See — Probes into ‘suspicious’ trading (http://www.cnn.com/2001/WORLD/europe/09/24/gen.europe.shortselling/)

    “Between August 10 and September 10, the NYSE says short sales of UAL Corp. increased 40 percent”

    Apparently our Dear Leaders didn’t ever bother seriously pursuing this lead in the War On Terrorism.

    Funny that.

    But I’m sure honorable folks like Admiral Poindexter wouldn’t ‘game the system’ in such a way.

  3. Rex asked:

    Dumping all your United Airlines stock doesn’t encourage crashing 747s into office buildings, does it?

    See — Probes into ‘suspicious’ trading (http://www.cnn.com/2001/WORLD/europe/09/24/gen.europe.shortselling/)

    “Between August 10 and September 10, the NYSE says short sales of UAL Corp. increased 40 percent”

    Apparently our Dear Leaders didn’t ever bother seriously pursuing this lead in the War On Terrorism.

    Funny that.

    But I’m sure honorable folks like Admiral Poindexter wouldn’t ‘game the system’ in such a way.

  4. Perhaps the senators are afraid that the market will outperform their Senate “Intelligence” Committees?

  5. First off, United has been “dead airline walking” since long before 9/11. Shorting UAL was pretty obviously a good move even then.

    Second, do you really think that someone would kill 3,000 people just to make money, when there are much easier ways to make much more money that don’t involve that kind of horror?

    “Total Information Awareness,” people like you give cranks a bad name.

  6. Among others, the reason that a market in intelligence futures is a superior way to gather intelligence is one of the same reasons that a market in anything is more efficient then a centralized, collectivized effort. In this situation it’s better information derived from the action of many actors seeking it with an incentive premium being paid by them for accuracy which serves to bid-up the desired product, in this case, the truth. These are some of the dynamics which drive toward quality in any market: from computers to oranges to futures.
    But must the government administer a futures market in terror? Would it be legal to have it be private like the other futures markets? Of course I know those idiot senators would put up an indignant fuss. Also, of course, they have the power to turn their mindless tantrums into the “law of the land”.

  7. The more I read about this idea, the more I like it. It’s a shame we won’t get to se it in action.

  8. do you really think that someone would kill 3,000 people just to make money, when there are much easier ways to make much more money that don’t involve that kind of horror?

    There seems to be no shortage of people, from newspaper pundits to congressmen, who think terror futures create an incentive to mass murder.

  9. It does appear that someone(s) with insider knowledge used A.B. Brown and other firms to put several put options on United and American Airlines.

    Enough questions were raised in the media in late 2001 that $2.5 million was left unclaimed.

    However the SEC/FBI/etc. has done virtually zero in tracking down the persons who placed these investments. As a libertarian, I find this curious. Perhaps you place blind trust in the state and its agencies, but I do not.

    A September 21 story by the Israeli Herzliyya International Policy Institute for Counterterrorism, entitled ?Black Tuesday: The World?s Largest Insider Trading Scam?? documented the following trades connected to the September 11 attacks:

    – Between September 6 and 7, the Chicago Board Options Exchange saw purchases of 4,744 put options on United Airlines, but only 396 call options? Assuming that 4,000 of the options were bought by people with advance knowledge of the imminent attacks, these ?insiders? would have profited by almost $5 million.

    – On September 10, 4,516 put options on American Airlines were bought on the Chicago exchange, compared to only 748 calls. Again, there was no news at that point to justify this imbalance;? Again, assuming that 4,000 of these options trades represent ?insiders,? they would represent a gain of about $4 million.

    – [The levels of put options purchased above were more than six times higher than normal.]


    Large put options were made on Reinsuruers as well . . . haven’t heard anything about that either.

  10. Byron Dorgan accused of cheap moral posturing? Gee, who’da thunk it…

  11. Another theory built in a vacuum that blows up when it hits reality. Kind of like totally free markets.

  12. So terrorists decide to bet that leader X gets assassinated because the odds are good. They then assassinate leader X because they stand to gain a lot of money. Yes, you are aware that leader X may be assassinated because people are buying futures, but it’s the futures market itself that actively encourages the assassination.

    Of course there is no reason why this principle doesn’t hold for western leaders, famous figures, celebrities, popstars, CEOs, you name it… The terrorists will give you the information of who they intend to assassinate, but the assassination will only take place because the market is there.

  13. Maybe (just maybe) other world leaders had a negative reaction to finding out the US was taking bets on who would be murdered first.

    It would be kind of hard to joke about something like that at the next G-8 meeting (“So, Chirac, I see you’re up to $30 a share…”) I’m not sure the value of the intelligence gained would offset the cost of the perception we were doing that.

    While the betting pool may be more accurate in determining which cheerleader will lose her virginity first, you can’t expect the cheerleaders to be happy when they find out about it.

  14. It seemed a bit alarmist to me to suggest that offering a financial incentive to accurately predict terrorism could be accused of “encouraging” it somehow. Dumping all your United Airlines stock doesn’t encourage crashing 747s into office buildings, does it? It’s the other way around, and that’s what the minds behind FutureMAP understood. I suppose buying stock in car rental companies that didn’t look like they were going to pay of otherwise *might* give someone motivation to hijack airplanes and crash them, trying to boost the car rental stock, but come on, that doesn’t sound very likely either…
    FutureMAP was created with the thought that since terrorism is bound to happen, someone with foreknowledge will likely be tempted to profit from it, and start betting big in order to get the payoff, which will alert the govt. This type of intelligence gathering is no different in principle from offering a $25 million reward for the whereabouts of Bin Laden or Saddam, but you don’t hear people griping about that encouraging the creation of more “evil ones”…

  15. Yeah, those rewards for OBL and Saddam have really worked. Let’s build on that.

  16. I don’t know, there’s some good arguments for it, but there are some good arguments against it.

    For one, it assumes that terrorists are mainly motivated by profit, and perhaps power. For another, it assumes terrorists are rational thinkers. They could just be nut jobs.

    Let me see… if I had pretty good information that a group of people were going to assassinate George W. Bush, would I tell the FBI, or would I just buy some futures instead?

    I pretty much agree that information is money. In my opinion, the government should have to PAY me for the information, something they are not usually willing to do. Usually they give an ultimatum – your information or your life.

  17. the difference being between a reward and betting on an assassination, since you can increase the assassination investment, but not the reward money.

    well, and all the other differences.

  18. Most of the progressive sites I’ve been to the past few days seem to think it’s a horrible, horrible idea. So it must be great.

  19. Looks like Bailey’s been reading The New Yorker. No wonder Reason is against intellecutal property rights.

  20. it could be an excellent way for upper eschalon terrorist funder type folks (i.e. the ones smart enough not to send their kids off to die) to make money. think about it – you’ve got a pool of gullible morons who are at least in some cases willing to die if they think you’re headed in the right direction. with enough degrees of separation from the actual people involved in the assassination and the anonymity of the process intact…

    but i think the horrifying factor only works if it pisses off left wing simpletons and right wing moralists at the same time. (or is that left wing moralists and right wing simpletons? they’re very hard to tell apart)

  21. Lefty, not every theory that is created in a vacuum blows up when it hits reality. This has been proven by the fact that not every idea that has come from your head has imploded. And weren’t those rewards responsible for getting Hussein’s two sons?

  22. Wouldn’t the idea actually have to hit reality first, Lefty? Or are you living in an alternate universe?

  23. Lefty:
    I agree that the profit incentive in the $25 Million Rewards for Saddam and Osama haven’t worked, although the ones for Uday and Qusay did.
    My point was that offering people with reason to believe a terror attack was imminent a chance to profit from making that knowledge public was no more immoral as an intelligence-gathering method than offering cash rewards for the whereabouts of the bad guys.
    If you’re making the argument that the profit motive doesn’t appeal to committed terrorists/bad guys/jihadists (otherwise we would have caught Bin Laden by now) I’m willing to accept that.

    But what critics of PAM don’t seem to realize is that the ability for terrorists to profit from terrorist attacks is still there even without FutureMAP/PAM: they can just dump their Disney stock the day before they release anthrax at DisneyWorld and sink that money into Gasmasks and Cipro stock. Canning the program has only made profiting from Insider Information easier!
    I have a post up on my blog about that if anyone is interested: “Insider Terror Trading will Continue, However…”

  24. The system has already been tried and it works — as exemplified in the political hedges of Iowa Electronic Markets. Unfortunately, the government requires futures markets to submit to extensive regulation, certification, and a physical trading pit. Academic systems, such as in Iowa, can get exceptions. Remember, however, that stocks and the like used to be illegal before anti-gambling laws were repealed.

    In addition, the amount that people could have invested in the PAM system was very small — so big profits like in the stock market wouldn’t be seen, protecting the system against those “gaming” the market.

  25. michael mauboussin, a CSFB economist, makes similar claims on the efficiency of price signals in information markets to make predictions (and i guess to allocate resources to make them come about?) based on academic theories and experimental, if informal, studies.

    http://www.capatcolumbia.com/Articles/FoFinance/Fof7.pdf http://interactive.wsj.com/archive/retrieve.cgi?id=SB967754702745044011.djm

    ..altho his assertion that even so-called dumb agents interacting in market structured information clearing activities can be efficient sounds dated post-bubble (using it as justification for new economy valuation). HP, apparently, has also been doing some work “on adapting information markets to small groups (

  26. well now…this kitten has claws…raaar!

  27. Sweetie? Sounds like someone else has “father” issues.

  28. An information market might be a nice idea for a lot of topics, but it seems pretty ineffectual in this case.
    As I understand it, markets like this concentrate diffuse knowledge into the aggregate index we call price. That’s handy in some cases. But advance knowledge of a terrorist attack is anything but diffuse- how many people knew about 9/11 in advance?
    A system like the one proposed could maybe quantify a collective “hunch factor” for certain general topics, like a country’s political stability, but it wouldn’t flush out the bits of closely held information that really matter to preventing terrorism, at least not any better than a good old-fashioned reward.
    And even if it did work, why would you bet on an attack that you thought was imminent if you knew that your bet might cause the event to be averted? You’d have to cash out just before the price hit a level that raised the right flags.

    All that said, there’s nothing wrong with DARPA throwing some money at stupid ideas occasionally, as long as the projects are just stupid, rather than stupid and pernicious, like TIA.

    Meanwhile, we are all treated to the “I’m more outraged than you are” pissing contest on Capitol Hill. What a waste.

  29. Who vilified it?

  30. I mean what reasoner vilified it?

  31. s.m.:

    Are you actually the anti-Ron from a parallel universe? If you two met in person, would you mutually annihilate in a shower of photons?

  32. Whenever considering the merits of ANOTHER activity for government to engage, my litmus test is ALWAYS – does a properly limited “government” BELONG in this business?

    In this case – as well as most other examples – the answer is a resounding NO.

  33. Someone please answer this.

    If the market is open to the public, and if a scenario with a high price is likely to attract increased attention from security services, why would a terrorist group known to be somewhat web-savvy choose that scenario?

    It seems that this market assumes that the terrorists are stupid, and can’t access the web. That seems like a bad set of assumptions.

    It’s a bad idea to tell terrorists where you’re focusing attention. That just lets them pick targets you’re not focused on – targets which have a low contract price on the market.

    Oh, one other thing.

    I have a feeling that the contracts with a high price would tend to be determined by the latest information from the White House. If the market were running now, there’d be a spike in 9/11-style hijacking attacks against the US, only because the US gave that warning, not because of any other information. (Well, the TSA budget tightwads don’t help either.)

    That means the market would be easily manipulable by the White House and Pentagon. If they wanted a war against Syria, they could start releasing trumped- up suspicions of impending attacks by Syria, resulting in a spike in contracts involving Syria, which could then be used by the White House and Pentagon to justify an attack.

    That’s one major difference between this market and others. The Government is the major source of information that’s likely to move the market, and there’s no good source of counterbalancing information.

    A market of this source would probably only be feasible if it were *not* publicly accessible, and if the traders were all intelligence analysts and the like – people with access to more information than just what the White House sees fit to release via CNN and Dan Rather.

  34. well since they’ve chilled the market by arresting people who’ve proposed similar markets, DoD kind of had to take the lead on this

    but its the fault of DoJ and the rest of the unwieldy non-limited government…

  35. fredH,

    That’s the funniest thing I’ve read since this morning’s edition of the New York Times. Anti-Ron, indeed.

    I’m surprised — but not really — that Mr. Bailey has taken this position. Regardless of his argument, DARPA’s futures idea feels like one of many of their interesting ideas with awful marketing. As other posters have said, WHY would you want to spend $8 million on an untried system (its creator himself said he didn’t know if it would work) that fosters even more ill-will in the international community, fuels bad feelings here at home about government competence and the use of taxpayer money, and may actually CAUSE activities to occur in the intelligence community that complicate rather than simplify the quest for information?

  36. Correct me if I’m wrong, but doesn’t Wall Street have a large number of highly educated and highly motivated people who work 70-80 hours a week to predict financial futures markets? And don’t they have a generally questionable record when it comes to the task of predicting specific market movements at specific times? What makes the DOD think their analysts could do better?
    Of course the political fall out from the proposed system would be a problem as several posters have already pointed out. Let’s see…we have a politically explosive idea which probably won’t provide us with any benefits. Maybe the politicians who squelched it aren’t so dumb.

  37. Maybe they should switch to plan B:

    Set up a big grid on the White House lawn, with each square mapping to a terrorist event.

    Then let a cow graze on the lawn, and see where the cow patties turn up.

  38. Good article, Ron, and a killer ending: “In the end, a promising research program that might have enhanced U.S. intelligence gathering was killed off by cheap moral posturing on the part of a couple of U.S. Senators. Who’s incredibly stupid now?”

    Dorgan & Wyden are bad, but don’t let others off the hook: Boxer, Daschle, even Warner. Thanks for making America just a little bit dumber, guys.

  39. Does Anon. really think The New Yorker is the first publication to cover this?

  40. Let it be said I don’t check my facts, but don’t let it be said I’m a weasel. The views of Mssrs. Alissi and Bailey are consistent, and though the former cast a lukewarm eye on PAM, he obviosuly didn’t vilify it.

    Some posters here did, though, until Mr. Bailey came out punching with his defense of DARPA’s $8 million version of something they could have gotten for almost nothing by having someone pitch the idea to a web gambling company.

    I was wrong: the views expressed here by Reason staffers were consistent from a policy standpoint. Mea culpa, etc.

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