almost of the evidence that people drug up in defense of these sorts of futures markets was unbearably anecdotal - like surowiecki’s ‘99 article is mostly just filled with stories of college professors who polled their class about the oscars and - magically! - the aggregate answer was right.

problem is that no one can identify any mechanism by which this sort of thing is working. we’re just supposed to accept on faith that because markets are SO SWEET they’ll just magically unearth the truth.

of course, none of those people polled about the oscars had any information - all that experiment demonstrated, really, was that when you poll an large group of people who have reasonably similar class and educational backgrounds to the members of the Academy, you’ll get a proxy for their decision. sorry, but that doesn’t really impress me.

here’s the thing: i don’t see why the opinions of you, myself, and joe sixpack who reads the international page of the new york times ought to be trusted about an area of the country of which we know almost nothing about, even IF you sample our predictions in aggregate. every article i’ve read darts around this question. either the writer makes some sort of lame attempt to suggest that markets uncover hidden information (better than the CIA? please.) OR we’re simply supposed to accept that somehow markets will get it right even when every individual participant is wholly ignorant of the actual facts (if you read his articles, surowiecki alternately makes both of these contradictory claims).

a more likely scenario? this terror market would move with a herd mentality - eg, every time the pentagon issued a warning about terror attacks, futures for “terrorist attack on america in the next six months” would spike. or the market would just inflame people’s existing fears - if all of a sudden, futures on ‘the president will be assassinated’ started to climb sharply, wouldn’t you think that people might flip out? or think about this - anyone unfriendly to the US with a little extra cash lying around could attempt to manipulate this market, spiking the price of ‘terror attack on new york in the next week’ simply to strike fear and cause general panic.

surowiecki makes some cop out arguments at the end - the first that, well, traders would really only have been middle east experts, not just average people. first of all, that’s probably not true - this wasn’t an ‘ask the experts’ session, it was a MARKET in which people take MONEY and invest it. either way, though, if this is the case, then why in the name of god was this developed as an open futures market? why not simply have the CIA hand out questionares to all these experts and then total up their results? seems a lot simpler than opening a goddamn futures market.

he also makes the claim that the market was really only going to speculate on the economic health and political stability of these countries, not on terror attacks themselves. again, based on what i read about what was being proposed, i don’t think that’s true, but even if it is, i think good-old-fashioned stock & bond markets in the countries in question already factor in those sorts of questions into their trading - imminent fears of the collapse of jordan would almost certainly be reflected in existing markets.

we’ve grown up in an era where markets were almost universally showered with praise - but if markets fail all the time, and i for one wouldn’t like to see what a market failure in a ‘terror market’ would look like.

-andy
http://home.uchicago.edu/~almartin