In 2003, the Pentagon nearly created a terrorism prediction market.

http://money.cnn.com/2003/07/29/news/terror_futures/

by zacharyvoase • 15 years ago

46 51 15 years ago

money.cnn.com

zacharyvoase2• 15 years ago

Other relevant links:

* http://en.wikipedia.org/wiki/Policy_Analysis_Market

* http://en.wikipedia.org/wiki/Total_Information_Awareness#Fut...

jdp23• 15 years ago

Poindexter and others pushing Total Information Awareness did a horrible job of marketing. The logo even had an eye in a pyramid, all the better to feed conspiracy theorists' concerns about the Illuminati! So in a rare victory for civil libertarians that Congress wound up defunding TIA.

Many of the individual projects continued forward or have since resurfaced. They just have better logos and acronyms now.

Duff• 15 years ago

You don't like this? What are you, some sort of communist?

The US Government has already sold the livelihood of most of its people (ie. industry) under the guise of the free market. Talk to someone who grew up in Buffalo, Cleveland or any number of places in Michigan and they'll tell you all about it.

Letting people make money off of betting on you getting blown up is just a more offensive way of getting rich on the backs of others.

zacharyvoase2• 15 years ago

I can’t tell who this comment is directed to, but I assume it’s me (the submitter). I am a big fan of prediction markets, and have no scruples as to their subject. I don’t see it as being ‘offensive’ in any way.

The suggestion that I am ‘some sort of communist’ does make me chuckle though :)

bennylope2• 15 years ago

This is an unhelpful comment.

The Policy Analysis Market was designed to allow registered traders (it was going to start as a market open only to select analysts, experts) to make money-backed predictions. That is, putting your money where you mouth is. It's a tool to filter noise and focus analysis, not fuel hedge funds.

watchandwait• 15 years ago

Duff's ignorant anger is why the program was killed.

eli3• 15 years ago

Obviously it creates a problem with incentives, but I thought it was a pretty cool idea. If you could get the volume high enough I bet it would be really informative.

RyanMcGreal• 15 years ago

I remember that. I actually put up a parody about it on my old personal web site:

http://www3.sympatico.ca/taylormcgreal/lottery.html

jsulak• 15 years ago

Talk about potential moral hazard...

metageek2• 15 years ago

No more so than buying insurance against terrorism.

_delirium• 15 years ago

There are (admittedly imperfect) rules for insurance sales that attempt to minimize the moral hazard, though. One must normally have an "insurable interest" to buy insurance, i.e. the potential to actually yourself suffer some harm if the insured-against event happens. So you can't just buy insurance as a pure bet, where if an event happens, you get a payout without suffering any harm from the event. For example, you can take out property insurance on your own property, but not on your neighbor's property, or on Stanford University's property, or on the World Trade Center (unless you own one of those).

notahacker• 15 years ago

Not really. Insurance companies have an interest in not paying the costs of terrorism; the insured have a vested interest in not being blown up. Both interests are aligned squarely against terrorism[1].

In a futures market, people betting on events occurring within a given time frame have their interests closely aligned with allowing or encouraging those events to occur. Even if you restrict it to carefully qualified security analysts who you're confident aren't backing terrorists, a prediction market financially incentivises them to withhold any intel they've obtained or observations they've made[2] that might disrupt terrorists' original plans.

[1]Unless you're trying to commit insurance fraud by staging attacks on your own overvalued property. No system is without weaknesses. [2]If there isn't any information asymmetry in their favour then there's no expectation of profit

eli3• 15 years ago

You are correct, but for what's it worth the market was intended to be for security experts. Not just anyone could place a bet.

JonnieCache3• 15 years ago

>market was intended to be for security experts

Oh. Phew. Now I know that only seasoned banking/finance professionals are involved I feel completely safe! Those guys never do any crazy shit!

EDIT: do you mean security experts or securities experts?

protomyth2• 15 years ago

If they could keep their mouths shut, some fiction writers of the proper genre would have been a pretty good add.

gwalker• 15 years ago

The amazing free market, the duct tape of neo-liberalism.

It's kind of a cool idea but seriously?

gwern4• 15 years ago

> "An incredulous stare is not an argument."

--philosopher David Lewis (1973)

adam2• 15 years ago

The government is now running prediction markets in several different branches (I know this because they're using our software - Inkling) and the TIA project comes up all the time in initial discussions. The comments however are usually that the idea was a good one and it was producing valuable information, they were just very tone deaf to perception issues.

jedc• 15 years ago

And for anyone reading, Inkling is an early YC company. W06, if I remember right. (Hi, Adam!)

Symmetry• 15 years ago

Sort of a shame how that all panned out. I was on a mailing list where Robin Hanson was talking about the upcoming Pentagon prediction market a month or so before the media got wind of it. I was very skeptical at first, but he did a very good job of meeting people's objections - mostly by explaining details of how it would be implemented.

Then the media got hold of the story and people raised all the objections I had heard before, but the explanations couldn't fit into single sentence sound bites so they never made it into the news.

protomyth2• 15 years ago

Sound bites beat reason quite a lot of the time. This is one of those projects I would feel good about, but wish they had never told the public. Keep it to security / terrorist experts and maybe some fiction writers, history profs / writers, and cultural anthropology profs.

Herring• 15 years ago

"A bad design with a good presentation is doomed eventually. A good design with a bad presentation is doomed immediately."

aothman• 15 years ago

My research involves making electronic agents to mediate interactions in markets, with one application being to prediction markets. One of the things I've discovered is that prediction markets where prices influence events are significantly more complicated from a theoretical perspective than a standard market. In such markets it can be difficult to predict how rational agents will act, even if they care only about their risk-neutral monetary payout and not about the events in question.

For instance, one of the new trends in prediction markets has been corporate elicitation (e.g., Inkling Markets YC W06). For instance, a market might ask a pool of employees "When will product X ship?". Now consider the employee's problem. He knows the product will be delayed until November at the current pace, but that if managers see high November probabilities they'll cut back on the project and re-focus development efforts (or, perhaps instead, shift some staffers over to get the project done faster). How should the employee trade in this market?

If your answer is "it's unclear" then you're exactly right. The self-referentiality of prices (they cause actions which then define prices) makes the problem much harder. It's actually possible to design markets which are so self-referential that any trade will be the right one (the market prices are self-predicting prophecies) or that any trade will be the wrong one (e.g., if there's a high price on terrorist attack Z then the government will always spend enough money to prevent Z from happening).

In fact, the only way around the paradox is to have the prices in a prediction market not matter at all - for the managers to take the same course of action regardless of the prices they see in the market. But then why run a market in the first place?

The whole thing is an interesting and seemingly fundamental perversion of the way we normally think about prices. And again, this is without any malicious intent on the part of participants, which will certainly only further confuse things.

T_S_4• 15 years ago

Well said. Economic theory show that the price system is a highly efficient way of trading allocations of scarce resources under perfect information. Funny thing about information, any scarcity is largely artificial, especially with today's technology. Also, if it is not shared, markets tend to disappear.

jacques_chester2• 15 years ago

That's a fairly sweeping generalisation of economic theory. Hayek, for example, explained that markets work for allocating scarce resources because they cause actors to share their incomplete information with each other through price signals.

Without a market, information is disjointed; everybody has some imperfect, incomplete part of the whole picture. Any planner will make irrational plans, he or she is dealing with a minute subset of information.

adam2• 15 years ago

This sounds right in theory, but isn't how we've actually seen it play out in practice.

For one, the people typically participating in a question like ship dates are not just from the project team, but from other roles as well, i.e. people who will be involved in marketing the product, selling the product, engineers who work on similar products, etc. These people have less of a direct interest in the outcome vs. simply expressing what they think is going to happen. So diversity of participation by role is pretty key.

Your point about self-fulfilling prophecy is also something we get asked about regularly. In practice, the market is available to trade 24/7 until the outcome is known. So going through your scenario, let's say the market is showing a really high likelihood something is going to ship late. Management decides to mitigate that risk by putting more people on the project. Well the market is still open, so if no one actually thinks putting more people on the project is going to do a damn thing, then the likelihood of being late will remain high in the market. Or maybe those people just got pulled from another project so now that project is in jeopardy. Well the market would hopefully begin to reflect that and when the answer is known everyone will be judged on whether they were right or not.

So ideally if your marketplace is setup correctly and people are actively participating, you're getting all this realtime feedback about what people think is going to happen AND you can even see what people think will happen in reaction to the management decisions you're making. Usually an employee wants management to know something is screwed up without having to stand up and say it to their face in a status meeting.

Also in your scenario you're assuming management is making decisions based on the prediction market alone. I've never seen this - instead it's one factor they consider among others. Despite my belief in the value of prediction markets, I also believe in management being able to make independent decisions. Prediction markets are just a simple and systematic way to get human input from those who have different perspectives.

jmount2• 15 years ago

Even if it were informative it might me more useful for terrorists than defenders. For example if the market correctly valued hard to fix vulnerabilities then all the market does is help terrorists pick targets (as the market is one big analyst leak and asymmetric warfare is by definition easier for one side).

hexis• 15 years ago

The same information that would help terrorists pick targets would also help the good guys prioritize which targets to protect better/first. Public information helps the good guys at least as much as the bad guys.

jmount2• 15 years ago

Asymmetric costs, asymmetric benefits. The market would just leak a bunch of info as different analysts show off.

xiaoma• 15 years ago

I can only imagine how a bubble in such a market might "pop".

JonnieCache3• 15 years ago

If we're in the market for predictions, my personal prophecy is thus:

DARPA, in an effort to offset the money wasted on this research, will pivot and attempt to sell this idea (and its obvious potential pitfalls) to the writers of 24 for the next series.

endtime• 15 years ago

Given that 24 has ended, I'm going to short your prediction.

JonnieCache3• 15 years ago

Gimme your email, with this kind of blue-sky financial thinking we should start a hedge fund.

dminor2• 15 years ago

Haha, amused to see this pop up on HN. I was the lead programmer on it.

Nothing quite makes you feel quite so connected to the national legislative process as seeing your project roundly condemned on the floor of Congress ;)

jamespitts• 15 years ago

I was working at the Hollywood Stock Exchange at the time and was completely perplexed by the "betting parlor" hyperbole used by the opposing congressmen. It seemed to me that the actual players of the game would be much more interested in the status of making the right call or in creating content than any money they might earn.

If you are able to comment on this, what were the underlying pricing mechanics of the market? How were new securities going to be created? Heh, to think that simulated stock market software might be classified...

dminor2• 15 years ago

We used Robin Hanson's logarithmic market scoring rule (http://hanson.gmu.edu/mktscore.pdf). The combinatorial aspect allowed us to try to answer questions about the correlation between different securities in the market - hopefully more interesting for policy analysis than a simple predictor of the future.

The main securities in the market were 5 statistics that we were tracking quarterly in 8 different Mid-East countries (things like civil stability, military activity, US aid, etc). Then there were supposed to be a handful of one-off type events; we hadn't decided on them yet, but gave some "ripped from the headlines" examples that were the main focus of the criticism. The values of all these securities were to be judged by the Economist Intelligence Unit.

eli3• 15 years ago

Decent article from James Surowiecki defending the program: http://www.slate.com/id/2086427/

guelo2• 15 years ago

My objection to this is that terrorist attacks are extremely rare events and there is not that much data about them so trading on this market would be very boring and you would almost always lose the boom bet. Anyway, anti-terrorism efforts seem like misplaced priorities, if you really want to save the lives of American you're better off working on ways to reduce car crashes or ways to stop people from eating cheeseburgers.

gwern4• 15 years ago

The markets were going to be about more long-term trends and political events - the sort of things analysts usually grapple with.

This too is one of the common under-informed criticisms.

guelo2• 15 years ago

TFA: "Under the plan, traders would buy and sell futures contracts on specific events such as terrorist attacks, based on whether they believed they would happen. "

How do you make a bet on a long-term trend? What kind of long-term trends? Political events?

zzzmarcus• 15 years ago

There's a great book on this, and related Pentagon initiatives called The Watchers:

http://www.amazon.com/Watchers-Rise-Americas-Surveillance-St...

Intrade• 15 years ago

www.intrade.com has been listing geo-political markets such as markets on the fall of Iran, capture of Saddam, Bin Laden and others and markets on WMD since Y2K.

In 2003, the Pentagon nearly created a terrorism prediction market.

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