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The recent intelligence blunders committed by U.S. agencies would be laughable if the results weren’t so tragic: FBI field agents’ unheeded warnings; intercepted phone calls stalled in processing; precious tips lost in “chatter.”

Four professors from the University of Iowa’s Tippie College of Business believe these sorts of mistakes can be cured with capitalist theory and software. Their newly formed company, called Martek Technology Systems, sells software that employs the basic trading infrastructure of Wall Street to create information markets that trade shares in unusual commodities such as political candidates or box office receipts.

While Martek’s main line of business is aimed at customers who want to use these online markets to forecast business performance and open up supply lines, some experts, particularly those in the U.S. defense community, believe this approach may be useful for predicting the next terrorist attack. 

For years, mathematicians have known that large groups of individuals are fairly adept at presaging outcomes, from company performance in the stock market to sports betting pools. In 1988, Tippie researchers created the Iowa Electronic Markets (IEM), a system by which people could buy and sell shares in U.S. presidential candidates, producing a more precise result than any pre-election polling data, demonstrating that this method can likely be applied to a wide range of industries. Subsequently, the IEM has set up markets that have predicted box office revenues, the performance of high-tech stocks, and the Federal Reserve bank rate-all with admirable accuracy.

Now this concept of trading on the future has made its way into the defense arena, catching the eye of the Defense Advanced Research Projects Agency, Martek’s first client. The agency is interested in using information markets to predict whether defense contractors will deliver projects on budget and on time. In other words, says Martek co-founder Joyce Berg, a contractor’s employees could go on the Web and delineate the status of current projects, enabling other employees to more accurately bid on whether a project will meet the objectives set out for it. “There are political ramifications inside a firm that keep information from flowing,” says Berg.  “People in an organization have information-like the faulty O-rings for the Space Shuttle Challenger-that never makes it to the top. A market is, in a sense, more democratic. You vote with the strength of your belief in your trade.”

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