Wednesday, November 25, 2015

Stephen L. Carter — Preventing Terrorism Through Markets

via Bloomberg View:

Maybe it’s time to bring back the Pentagon’s terror prediction market. Remember that much-maligned experiment? Toward the end of Bill Clinton's administration and into the early days of George W. Bush's, DARPA began studying the feasibility of establishing an electronic market where participants would risk money on geopolitical trends, mostly in and around the Middle East. Given the success of prediction markets in other realms, intelligence analysts at the Defense Advanced Research Projects Agency were interested in whether such a market might prove a useful tool in their work. The program was called the Policy Analysis Market, and it was a very good idea.

Prediction markets work by allowing investors to trade securities that are priced to reflect other investors' beliefs about the likelihood that a particular event will occur. If you are holding the security and the event occurs then you “win.” They are generally regarded as useful tools for aggregating information that is decentralized. Electoral prediction markets, according to their supporters, are more accurate than political polling. If the markets are as good as claimed, one theory on why they work so well is that people incorporate less their own preferences than their knowledge of how friends and neighbors plan to vote. And with money at stake, they “bet” with their heads rather than their hearts.

Read the full article HERE.