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To: LPS5 who wrote (1168)	7/29/2003 7:36:19 AM
From: LPS5	Read Replies (2) \| Respond to of 2534

My question is, do you find this ethical, or unethical? Personally, I think it's a terrific and bright idea, from the perspective of attempting to harness the information-focusing power of markets in order to develop a texture for correlations (if they exist) between expectations and likelihoods where geopolitical events are considered. But therein, despite the positive and synergistic aspects of the plan, lies what I believe is the rub: the price discovery process will be driven by speculators. Even among those with a political/military background, their guesses will simply not originate from as sound a knowledge base as that of 'experienced' dictators, terrorists, and other such individuals. (Indeed, one might conjecture that those market participants filling the inevitable role of 'noise trader(s)' might fare well, even better, than those who trade with an edge.) Therefore - while the first few years will require some calibration with actual events - it remains to be seen how truly predictive the models are. Perhaps the guys in Guantanamo and other such miscreants in can become market makers or proposition players - a more constructive application of their 'skills' than making license plates or staring at the walls, to be sure. LPS5

To: LPS5 who wrote (1168)	7/29/2003 8:17:40 AM
From: LPS5	Respond to of 2534

Can a 'terror futures market' work? by John W. Schoen, MSNBC The conventional wisdom holds that financial markets combine the collective wisdom of the millions of investors who participate in them. So what if you could use that market force to help predict political upheaval in volatile places like the Middle East? That's exactly what a Defense Department project is trying to do -- despite Senate critics who say the effort is nothing more than state-sponsored "gambling on terrorism." THE PROJECT IS modeled on "futures" exchanges like the Iowa Electronic Markets, a popular Web-based market that lets political junkies place bets -- with real money -- on the outcome of political elections. The Policy Analysis Market, which is set to begin signing up "investors" on Friday, is designed to let Middle East experts place bets on political and economic events in the Middle East, according to Charles Polk, president of Net Exchange, a small San Diego, Calif. company hired by the Pentagon's Defense Advanced Research Projects Agency, or DARPA, to set up the market. "This isn't really a terrorism market," he said. "What we're trying to do is look forward a year into the future and try to glean some insight into political and economic and military currents in the Middle East. During the initial test phase, the site will be limited to 100 "traders," chosen from Middle East experts at universities and think tanks, who will get $100 each to buy and sell futures contracts based on events in eight Middle East countries. The online trading system could eventually be scaled up to include 10,000 traders. Possible "contracts" could include questions like the overthrow of the king of Jordan or the assassination of key figures like Yasir Arafat. These contracts would deal with events in each country related to five major categories: military preparedness, civil stability, economic health, U.S. military involvement and U.S. economic investment, said Polk. The market is also designed to allow trading in "derivatives" and complex hedging strategies -- linking, say, renewed economic growth in Israel to the prospects of approval of Palestinian statehood. By placing thousands of individual bets, market participants would shape forecasts about future events. The value of the contracts would fluctuate based on market participants' beliefs about the likelihood of specific events taking place -- moving higher if they appeared likely and lower if unlikely. Contracts will expire quarterly and extend a year and a half into the future. Each contract would be fully valued at $1 -- the payoff for an accurate prediction. "You can go into the (Policy Analysis Market) and ask it for that derivative: 'If U.S. involvement here were to increase, please give me a quote on Syrian civil stability,'" said Polk. "You just ask for a quote." But a pair of U.S. Senators doesn't think this is all such a great idea. On Thursday, Sen. Ron Wyden (D-Ore.) and Sen. Byron Dorgan (D-N.D.) called on the Defense Department to halt the project, saying the "terror-wagering scheme" was a waste of taxpayer dollars -- especially after a recent report on Sept. 11 citing breakdowns in conventional intelligence gathering. "We don't need a lot of fictional scenarios," said Wyden in a telephone interview. "We're not dealing with communication and follow-through in the real world; we think that's what ought to be the focus, rather than trying to chase down these mysterious scenarios with taxpayers dollars." Among other things, the senators say they're concerned that terrorists could place bets on the site -- and then profit from the accurate prediction of attacks that they carry out. DARPA has promised investors that it won't be able to identify individuals who sign up for a trading account. But Polk says that -- if terrorists were to bet on their own attack -- that would create exactly the kind of warning signal the Policy Analysis Market is designed to highlight. "They're going to move some prices," he said. "And they're going to move those prices to levels way above where the market has been striking them. So people are going to say, 'Why is that price up?'" But it remains to be seen whether the project will get out of the planning stages. Polk says the project is funded through March, 2005. DARPA officials declined a request for an interview. The agency said in a statement late Monday that "research indicates that markets are extremely efficient, effective and timely aggregators of dispersed and even hidden information. Futures markets have proven themselves to be good at predicting such things as election results; they are often better than expert opinions." But DARPA said it "will continue to reevaluate the technical promise of the program before committing additional funds beyond Fiscal Year 2003." Wyden says he's already forced the Defense Department to obtain Congressional approval before going beyond the initial test phase. And he's hoping to kill the project altogether in an upcoming House-Senate conference on defense spending. "This far out stuff -- at a time when we're not dealing with the basics -- is not a good use of resources and the limited dollars that are available," he said. "Trading on corn futures is real different than trading on terrorism and atrocity futures. One is morally fine and represents free enterprise, and the other one is morally over the line." Backers of the project are hoping that, if it catches on, the Policy Analysis Market could eventually be used by companies trying to hedge the risk of doing business in the Middle East. But even if the project is allowed to go forward, it's also not clear whether this futures market has much of a future beyond a parlor game among Middle East analysts. For one thing, companies already have well-established markets for hedging risks. Moreover, the volatility of the region would likely wipe out any traders who decided to jump in, according to Jim Placke, a Middle East analyst with Cambridge Energy Research. "The potential for major losses is always likely to outweigh gains," he said. MSNBC Terms, Conditions and Privacy ©2003