Online exchanges eye "futures" after Pentagon

NEW YORK: The Pentagon's roundly vilified plan for a terrorism "futures" market was axed last week before it saw the light of day, but some private online betting exchanges may soon pick up where the government left off.

However weird it may seem, the Pentagon's hope was that such "futures" contracts would help it take advantage of the predictive ability of markets to help prevent future attacks and track key political developments.

While the U.S. Congress jumped all over the quirkier plans for contracts on assassinations and terrorist attacks, the exchange also planned "futures" based on the stability of governments in the Middle East that could have yielded valuable intelligence about the volatile region.

Futures markets for everything from box office receipts to orange juice have often proven uncannily accurate at assessing the likelihood of a potential outcome, and economists said political contracts were the next logical step.

To John Delaney, chief executive of online exchange Tradesports.com and originator of "Saddam futures" before the Iraq war, the Pentagon's proposed exchange was not as ridiculous as critics advertised. His company plans to take up some of the ideas the government abandoned.

"If you find something so macabre and distasteful to think about- a terrorist attack on Washington - if you don't even want to think about it, that's the type of intelligence people need, the likelihood of that happening," he said.

"The most actively traded contracts in foreseeable futures are political contracts. With contracts like political and geopolitical contracts, you have information flow. Information drives market and you're going to have a lot of trading," he said.

Before the Web site for the Pentagon exchange was wiped clean, some of the contracts to be offered were based on the probability of a nuclear strike by North Korea and of the assassination of Palestinian leader Yasser Arafat.

That unleashed widespread anger in Congress, where Democrats and Republicans alike branded the proposed exchange "harebrained," "unbelievably stupid" and a way for traders to profit from turmoil and death. The Defense Department promptly buried the program.

Earlier this year Tradesports received widespread notoriety for its "futures" contracts on when Saddam Hussein would be deposed as the leader of Iraq. Now it has contracts on when Saddam will be found, along with another on the likelihood of weapons of mass destruction being uncovered in Iraq.

Another Web site offering betting on current events is NewsFutures.com. Its contracts include whether Arnold Schwarzenegger will be elected governor of California and whether British Prime Minister Tony Blair will lose his job this year.

In response to the Pentagon furor, Tradesports started a new contract: whether John Poindexter, the controversial head of the agency responsible for coming up with terrorism futures, would keep his job by the end of August.

It didn't take long, with Poindexter soon resigning under the cloud of this latest scandal during his tenure.

For some economists who have studied the prophetic power of markets, the fundamental idea of betting on political events is not that far fetched.

"There's a lot of evidence that suggests markets are a very good way of aggregating information. The idea is good and worth exploring," said Justin Wolfers, an assistant professor of economics at Stanford University, who has studied the subject.

Wolfers said the idea that such markets could predict an event like the Sept. 11, 2001 attacks on the U.S. was "just plain wrong" because it would be very difficult to devise contracts on such a low probability event as terrorism.

But trading contracts based on broader political events, especially those of interest to global financial markets, would be feasible and help define in a more transparent way their potential impact. Scenarios could include the overthrow of governments, how long U.S. troops will remain in Iraq or whether Britain will ditch the pound for the euro.

For example, contracts to buy and sell orange juice at a price agreed today for delivery at a future point in time, as traded on the New York Board of Trade, are often better at foreseeing weather changes in Florida than the National Weather Service.

Similarly, bets on the success of presidential candidates are often more accurate than pundits and polls, and Hewlett-Packar set up an internal market among employees for sales forecasts that proved far more accurate than its official predictions.

An anonymous futures market could help the U.S. government solve one of the problems that led to the Sept. 11 attacks: pooling information from many voices, especially within the intelligence community, that may get bottled up in bureaucracy.

© Reuters