By Ken Guggenheim
July 29, 2003 | WASHINGTON (AP) -- The Pentagon will abandon a plan to establish a futures market to help predict terrorist strikes, the chairman of the Senate Armed Services Committee said Tuesday.
The little-publicized Pentagon plan envisioned a potential futures trading market in which speculators would wager on the Internet on the likelihood of a future terrorist attack or assassination attempt on a particular leader. A Web site promoting the plan already is available.
When the plan was disclosed by two Democratic senators Monday, the Pentagon defended it as a way to gain intelligence about potential terrorists' plans.
The program is called the Policy Analysis Market. The Pentagon office overseeing it, the Defense Advanced Research Projects Agency, or DARPA, said it was part of a research effort "to investigate the broadest possible set of new ways to prevent terrorist attacks."
Traders would buy and sell futures contracts _ just like energy traders do now in betting on the future price of oil. But the contracts in this case would be based on what might happen in the Middle East in terms of economics, civil and military affairs or specific events, such as terrorist attacks.
Holders of a futures contract that came true would collect the proceeds of traders who put money into the market but predicted wrong.
A graphic on the market's Web page Monday showed hypothetical futures contracts in which investors could trade on the likelihood that Palestinian leader Yasser Arafat would be assassinated or Jordanian King Abdullah II would be overthrown. Although the Web site described the Policy Analysis Market as Middle East market, the graphic also included the possibility of a North Korea missile attack.
In its statement Monday, DARPA said markets could reveal "dispersed and even hidden information. Futures markets have proven themselves to be good at predicting such things as elections results; they are often better than expert opinions."
According to its Web site, the Policy Analysis Market would be a joint program of DARPA and two private companies, Net Exchange, a market technologies company, and the Economist Intelligence Unit, the business information arm of the publisher of The Economist magazine.
DARPA has been criticized by Congress for its Terrorism Information Awareness program, a computerized surveillance program that has raised privacy concerns. Wyden said the Policy Analysis Market is under the supervision of retired Adm. John Poindexter, the head of the Terrorism Information Awareness program and, in the 1980s, national security adviser to President Reagan.
The Web site does not address how much money investors would be likely to put into the market but says analysts would be motivated by the "prospect of profit and at pain of loss" to make accurate predictions.
Trading is to begin Oct. 1. The market would initially be limited to 1,000 traders, increasing to at least 10,000 by Jan. 1.
The Web site says government agencies will not be allowed to participate and will not have access to the identities or funds of traders.
The market is a project of a DARPA division called FutureMAP, or "Futures Markets Applied to Prediction."
"The rapid reaction of markets to knowledge held by only a few participants may provide an early warning system to avoid surprise," the FutureMap Web site said.
Dorgan and Wyden released a letter to Poindexter calling for an end to the program. They noted a May 20 report to lawmakers that cited the possibility of using market forces to predict whether Israel will be attacked with biological weapons.
"Surely such a threat should be met with intelligence gathering of the highest quality -- not by putting the question to individuals betting on an Internet Web site," they said.
Wyden said $600,000 has been spent on the program so far and the Pentagon plans to spend an additional $149,000 this year. The Pentagon has requested $3 million for the program for next year and $5 million for the following year.
Wyden said the Senate version of next year's defense spending bill would cut off money for the program, but the House version would fund it. The two versions will have to be reconciled.
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New Scientist : Pentagon cancels futures market on terror
13:17 30 July 03 Celeste Biever and Damian Carrington
In an extraordinary day in Washington on Tuesday, a government-backed futures market aimed at predicting terrorist attacks and other events was both revealed and then cancelled.
The market, which was due to start up on Friday, was condemned as a "market in death and destruction, and not in keeping with our values" by Senator Hilary Rodham Clinton. Following the outcry, the Pentagon cancelled the research project.
However, experts point out that intelligence gathering is frequently a dirty business and that the scheme could potentially have provided a cleaner, and potentially more accurate, way of obtaining valuable information.
The project, called the Policy Assessment Market, aimed to predict events relating to US interests in the Middle East by encouraging anonymous investors to speculate in an online futures market.
In the market, investors would have bought contracts that pay out if specific events happen. The contracts could have been complex, such the number of terrorist attacks against US citizens by the end of 2003, if US troops are not removed from Saudi Arabia. Other examples given included the assassination of Palestinian leader Yasser Arafat or the overthrow of Jordan's ruling family.
The value determined by the market for these contracts is then a measure of the likelihood of the events happening. But outraged politicians said the inherent ghoulishness of the plan outweighed any potential benefits. "It is a pie-in-the-sky project that is morally questionable and dubiously useful," says Carol Guthrie, spokesperson for Oregon senator Ron Wyden, who helped bring PAM to public attention.
PAM was the brainchild of the economist Robin Hanson, at George Mason University in Virginia, who teamed up with a small business in California called Net Exchange. The US Government's Defence Advanced Research Projects Agency (DARPA) awarded $750,000 to Net Exchange to apply Hanson's technology to events in the Middle East.
Using futures markets to predict future events is not new. US presidential elections have been analysed by the Iowa Electronic Markets (IEM) since 1986. It claims to be twice as accurate as pundits.
The suggested advantage of such markets is that the profit motive efficiently gathers information from a very wide range of sources. Real money is at stake, meaning informed speculators may reveal knowledge they would otherwise keep secret. Also, the prospect of financial loss discourages uninformed speculators. Futures markets have accurately predicted a wide range of events, from Oscar winners to commodity prices.
The decision to cancel PAM was "pure political" according to one DARPA-funded expert. And Hanson says: "The nature of intelligence is that you are paying people to tell you something unpleasant. But if you want information about such things, I don't see how [PAM] is morally better or worse than any other way of paying for such information."
But other observers argue the benefits of PAM were not clear-cut. Thomas Rietz, a director of the IEM, is doubtful speculators would really have provided helpful intelligence. When betting on presidential elections, he says, people can use their network of friends, family and workmates to form an opinion - that would not be the case for terrorist activity.
PAM's opponents also point out that it might even have allowed terrorists to profit from their own atrocities, or to change the dates of attacks if PAM was making an accurate prediction.
But Joyce Berg, also a director of the IEM, believes PAM would have been worth a try: "I think that we need more ways to gather information. This project was a possible way and the only way to find out if it can work is to test it."
VERBOSITY NOTE : Is this the ultimate expression of fundamentalist capitalism or what?