Trading on the Future

Continued from page 1

By Daniel Tynan

June 21, 2002

Cornering the Market on Terror

But DARPA aims to use information markets to do more than simply keep contractors in line. According to Michael Foster, program manager for DARPA's Information Awareness Office in Arlington, VA, the next step is to determine whether or not they can predict political unrest in different regions of the world.

"It's quite likely there are people in parts of the world, like embassy employees, academics, etc., who have information about that region that's not held in any small group of security experts," says Foster, whose office recently sponsored a two-day workshop on using markets for decision support. "We want to tap into those broader sources of knowledge."

Information markets can collect such knowledge more quickly and easily than traditional methods, says Ely Dahan, assistant professor of marketing at UCLA's Anderson School of Management. Dahan has used information markets to conduct product research. In one market, students bought and sold shares in different sport utility vehicles using a Web-based trading interface that rated each model on features like gas mileage, horsepower and size. Dahan used the prices of each SUV's shares to determine the product features traders valued most. He says similar techniques could be applied to help prevent terrorist attacks.

"Imagine if FBI agent Coleen Rowley had access to such a market, and the minute she noticed the Moussaoui information she created a security called the Al Queda Threat," muses Dahan. "Let's say the payoff is $1 if the threat becomes true, and zero if it doesn't. The value of the security is the expectation the threat will become true. If the security is trading at 10 cents, the market predicts there's a 10 percent chance it will happen."

People with access to inside information about Moussaoui-such as intelligence personnel and others well versed in terrorist activity-begin buying and selling shares in the Al Queda Threat. If the share price suddenly climbs to 40 or 50 cents, it becomes clear that traders in this market think something is about to happen. At the very least, says Dahan, "it would trigger a signal to say let's pay attention to this one.'"

Such a scheme would have to solve huge ethical and legal problems first, says Foster. For example, since research shows markets are more accurate when traders are given an incentive, how would they be compensated? An even thornier question: how to keep a terrorist from rigging the market by fulfilling the prediction? Then there's the secret nature of the information itself. "Do we want the public-which includes Al Queda-to know the probability of the Moussaoui threat?" asks Dahan.

Researchers are still studying whether such markets are feasible, says Tom Rietz, another Martek principal. "It's difficult to say what this approach might work for, what questions it might answer. We have no real predictions' at this point."

But for intelligence agencies that lose faxes and ignore phone calls, anything could help.