Put Your Money Where Your Mouth Is

Instapundit reports that the Pentagon's DARPA think tank has proposed a "Futures Market", where experts could "bet" on the likelihood and means of different types of terrorist attacks.

Here's how it'd work:

Traders bullish on a biological attack on Israel or bearish on the chances of a North Korean missile strike would have the opportunity to bet on the likelihood of such events on a new Internet site established by the Defense Advanced Research Projects Agency.

The Pentagon called its latest idea a new way of predicting events and part of its search for the "broadest possible set of new ways to prevent terrorist attacks."

Two senators - including North Dakota's Byron Dorgan - have been rolling in troughs of press coverage for criticizing the plan:

...Dorgan of North Dakota, said the idea seemed so preposterous that he had trouble persuading people it was not a hoax. "Can you imagine," Mr. Dorgan asked, "if another country set up a betting parlor so that people could go in — and is sponsored by the government itself — people could go in and bet on the assassination of an American political figure?"

After Mr. Dorgan and his fellow critic, Ron Wyden of Oregon, spoke out, the Pentagon sought to play down the importance of a program for which the Bush administration has sought $8 million through 2005. The White House also altered the Web site so that the potential events to be considered by the market that were visible earlier in the day at www.policyanalysismarket.org could no longer be seen.

But by that time, Republican officials in the Senate were privately shaking their heads over the planned trading. One top aide said he hoped that the Pentagon had a good explanation for it.

I'm hoping the Pentagon uses the one really good explanation there is for such an idea.

It works.

The Pentagon, among others, have used the idea of the wager (and what is a futures market but informed wagering about commodities and events rather than sports?) to great effect.

Ironically, I just read about one of the most dramatic examples yesterday. In 1969, a Navy submarine, the USS Scorpion, disappeared on its way home from the Mediterranean. Craven - a primary architect of the nuclear power and Polaris missile programs - was one of many Navy scientists involved in trying to find the sub. They had very few clues to work from - a number of ambiguous sonar echoes from explosions, mainly.

Craven and many other scientists analyzed the data, and came up with several possible conclusions - although Craven's conclusion disagreed with most others (he believed that the submarine was east, rather than west, of the source of the original explosion.

Finally, to resolve the mystery, he gathered up all the information available (as well as some simulations he'd carried out), and put it in front of a group of experts. Each expert weighed the information in front of him, and wagered a bottle of Chivas Regal on their respective results.

Most of the bets trended toward a point east of the original echo. When a deep-submergence vehicle finally went to the scene (after fruitless weeks searching west of the echo, where the Navy brass felt it would be), the Scorpion was found - about 1000 yards from where Craven and most of the parties to the bet thought it would be.

The lesson? Opinions - and theories - are like, er, eyeballs. Just about everyone has a couple. But wagering - assigning a value to your theory - forces people to, as it were, put their money where their mouths are.

Josh Chafetz sums up the advantages:

Knowledge and expertise are widely diffused in any society. As I explained at length in a post on Hayek last year, complex systems function by finding ways to aggregate diffuse knowledge into simple indices, which then allow actors in the system to take advantage of knowledge that they don't actually have (e.g., no one knows exactly what Americans' breakfast cereal preference orderings are, but by watching the information-aggregating index that we call "price," producers can generally ensure that, when you go to the supermarket, you'll find the brand you want. Compare that to the shortages of some items and overproduction of others that centrally planned economies have produced). A futures market in terrorist attacks, while it sounds grisly, may help us to aggregate diffuse knowledge in a way that will prove superior to expert knowledge.

Wagering has the effect of forcing people to cut through the theories, clarify their thought processes, and get to the answers.

So what's the problem? Apparently, to Byron Dorgan, it's just not right, applying market principles - Gambling! - to predicting the future.

UPDATE: Vodkapundit beat me to the story by about eight hours (I didn't know about the "market" idea until I read it on Reynolds' site) - but reached the identical conclusion, for the same reasons, even citing the example of the search for the Scorpion. He also fully closes the loop of the stock market analogy:

The "market" for intelligence works, such as it does, opposite of the stock market. A guy who knows one important bit often can't effectively share it with another guy in another agency who knows another important bit – and so two plus two ends up equaling something quite less than four. Those who simply have good hunches generally aren't intel pros, and therefore aren't given much credence by the government. And so hidden knowledge remains hidden, and good guesses go unheeded. Then people die.

Now that is a truly grotesque system, yet that's how the intelligence world has operated for approximately ever.

Would investors put their money on the line if there weren't any profits to be made? Of course not. Yet today, we ask our military and intelligence professionals to risk their reputations and careers, working mostly in the dark, with zero extra incentive.

It'll be interesting to see exactly how many other bloggers came up with the Craven/Scorpion example independently.

FURTHER UPDATE: Spoke too soon. According to Boomshock, the Administration chickened out.

Deputy Defense Secretary Paul Wolfowitz just told the Senate Foreign Relations Committee that PAM is going to be terminated: "[I]t sounds like maybe [DARPA] got too imaginative."

Sigh. Back to the status quo.

Given all the stories of the standard-issue government mismanagement at Homeland Security and the bungling of the intelligence in the War on Terror so far, can you imagine what the imposition of some kind of free market discipline could do for our effort?

Hopefully, this idea survives somehow.

Posted by Mitch at July 29, 2003 09:06 AM