Deep-sixing a bright idea
THE PENTAGON LAST WEEK CAVED in to Democratic criticism and pulled the plug on a program called the Policy Analysis Market. It also pulled the plug on retired Adm. John Poindexter, who ran the program. The market would have allowed traders to speculate in an artificial market on economic and political events in the Middle East, including assassinations and terrorist attacks.
Sen. Ron Wyden (D-Ore.) called the program "repugnant" and "morally wrong." Sen. Byron Dorgan (D-N.D.) described it as useless, offensive, and "unbelievably stupid," and the New York Times piled on with an editorial calling on the Pentagon to fire Poindexter.
There is a minor problem with all their declarations about the Policy Analysis Market: It just might have been the most accurate predictor of terrorist activity available to us in the war against radical Islamists. Instead of asserting the all-too-familiar orthodoxy of both Washington and New York, the capitals of politically correct-inspired conformity, Wyden, Dorgan, and the editors of the New York Times might have asked how useful a tool the market could have been in the war on terror.
Smart money. As it turns out, such markets are actually very successful at predicting nonfinancial outcomes and events. The best-known and possibly most successful example is the Iowa Electronic Markets, a system set up in 1988 at the University of Iowa as a way to examine the behavior of markets. Results from the IEM have been better at predicting the outcome of political elections than opinion polls. Since its inception, the system has successfully predicted the outcome of every presidential election. Robert Forsythe, board member and cofounder of the IEM, told me the way that the Defense Advanced Research Projects Agency exchange was going to work appeared logical. "[It would have run] contracts whose payoffs were tied to the GDP of Iraq and Iran; that could make a lot of sense to me."
Similar markets have succeeded in other areas. Richard Roll, a professor at the Anderson School at UCLA, was able to predict Florida weather, using the price of frozen orange juice futures, more accurately than published meteorological forecasts. And an artificial market at Hewlett-Packard, which compiled sales estimates of select employees, beat the company's official sales forecast 15 out of 16 times.
Opponents of the Policy Analysis Market, including Dorgan's South Dakota colleague Sen. Tom Daschle, complained that the system would produce undesired side effects, saying the program would be "an incentive actually to commit acts of terrorism." Even by Daschle's standards that rhetoric is hyperbolic nonsense. In reality, the scale and size of this market were such that it would be highly unlikely that traders would attempt to sway outcomes.
Eric Zitzewitz, assistant professor of economics at the Stanford Graduate School of Business, explains, "I just think [Daschle] has the magnitudes wrong. My guess is that you'd be hard pressed to make more than $1,000 playing that sort of game, and I have no idea what the going rate for an assassination is, but my guess is it's quite a bit above that."
Even after the Pentagon announced it would abandon all plans for the program, Sen. Jeff Bingaman (D-N.M.) called for Poindexter's resignation. And in an exceptional display of narrow-minded, hidebound thinking, Sen. Barbara Boxer (D-Calif.) proclaimed, "If it's going to end, I think you ought to end the careers of whoever it was who thought that up." Left-wing conformity, anyone?
And what about the right wing? I thought that Donald Rumsfeld liked out-of-the-box thinking, but tough guy Deputy Secretary of Defense Paul Wolfowitz couldn't disavow the program fast enough.
We will never know if the Policy Analysis Market would have been successful. But if there were even a small chance that it could have been a useful tool, there should be, at a minimum, further discussion of the idea. This is, after all, not a matter of just partisan politics but one of national security. And forcing the resignations of those involved with the planning is a strong deterrent to progressive thinking, of which we have no surplus.
William O. Douglas, the former Supreme Court justice and Securities and Exchange commissioner, said, "The great and invigorating influences in American life have been the unorthodox: the people who challenge an existing institution or way of life, or say and do things that make people think." Thinking isn't always the strong suit of either the left or the right. And thinking is our best weapon in the war on terror.
This story appears in the August 11, 2003 print edition of U.S. News & World Report.
advertisement
