I stayed away from the idea of the idea futures market that’s generated a lot of controversy lately. (Quick aside: You’ve got to love the title of Pravda’s article: “Pentagon Gives Up Terrorist Totalizator”) I understood the idea, but I wasn’t sure whether I bought its efficacy. This editorial by one of my favorite Reason authors, Ronald Bailey, convinced me that I understood it well enough to assail its efficacy.
Futures markets in general are as close to national legalized gambling as you can get. When you buy pork belly futures for a certain price, you’re betting that the price will match or exceed the price you paid. How can you know that? There’s not really any special insight or intuition that futures traders have in this regard. I’m sure they’ve studied the pork belly market and, if they’re successful, they’ve been doing it for years, but the future isn’t known and anything can happen. What’s more, there’s a whole bunch of data available and the variables are largely predictable, though not completely.
A futures market for ideas and events struck me as ludicrous. Not only was I skeptical that anyone outside the intelligence services would be participating, I didn’t see how anyone would be willing to bet on such an unpredictable and uncertain outcome. To bet on the likelihood that the Syrian prime minister will be assassinated doesn’t seem macabre to me, but it does sound foolish. When do close the bets? When he dies? At some predetermined point in time? If the terrorists were aware of the bets and that they suggested some course of action, wouldn’t that encourage them to stop planning in that direction and do something that wasn’t being bet on? I think so.
That’s the rub as far as I’m concerned. Betting on future events and then using that information to guide policy and action strikes me as outlandish. “Ooo, futures trading in our invading North Korea is through the roof! They must know something we don’t know. Prepare the B-52s (no, not them, Colonel, the big bombers).” Obviously, that’s a simplification—and a funny one at that—but the real problem is that it seeks knowledge secondhand. They must know something we don’t already know. Instead of focusing on gathering the most useful, accurate intelligence, we look to the market for insight. What’s worse, we don’t really know if we’re right until the event actually takes place and the winner is determined. Only then, the predictive value of the market is zero.
It’s an interesting idea, but I think it should be kept as an idea. (Another aside: Bailey cites several different futures markets offered by TradeSports.com. Crazy stuff!)