Time to reconsider terrorism futures

Marketplace Staff Aug 11, 2006


KAI RYSSDAL: Not long after Sept. 11, the Defense Department had an idea. Economists use markets to predict all sorts of things, right? So why not create a futures market to help avoid another attack? The Washington political establishment didn’t think much of that. Too morbid, they said. After yesterday’s news of a new threat, economist and commentator Susan Lee says that’s too bad.

SUSAN LEE: A futures market for terrorism is a great idea.

That’s because Markets are much better at collecting and evaluating information than anything else on the planet.

Think of futures markets as predictions markets.

Take the futures market for orange juice. It’s a better predictor of the weather in Florida than the National Weather Service. Or the Hollywood Stock Exchange. It’s got a peerless record in predicting Oscar nominees and Academy Award winners.

Certainly a large, active market for predicting where and when terrorists might strike would be better than the bureaucracy known as Homeland Security.

This is how it would work. The market would offer specific contracts on certain events-like the fall of the Saudi government by December 31.

Traders, those who buy and sell the contracts, bring all their disparate information on the political situation in Saudi Arabia into this central marketplace. Their bets on the probability of this one terrorist action would be reflected in the price of the contract.

This price then acts as a signal for those in government about where intelligence efforts might be fruitfully directed.

Simply put, the market would enhance intelligence gathering.

Now, you might wonder, why would somebody with really good information want to share it with the world?

Well, when that person with the really good information becomes a trader, a buyer or seller of that information, he or she can profit by it.

Wait, you say, allowing people to profit by a market in death and destruction is a vile idea. But we’ve already got a market that profits by death and destruction — it’s called the insurance market.

Every day, insurance companies earn money by predicting who will die and when, and what kind of disaster might strike.

In the last three years, terrorism has flourished. Maybe it’s time to add one more weapon to the arsenal.

RYSSDAL: Economist Susan Lee lives in New York City.

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