Dr. Strangelove’s Gambling Parlor

[elder999]

It’s the kind of dog-day story you’d have hoped was only a joke-but it wasn’t. The Bush administration has been caught in an attempt to create a money market in human misery.

The Pentagon’s (read-”your” ) Defense Advanced Research Agency, which gave a grateful nation the Total Information Awareness System for electronically tracking every American citizen’s move, has spent half a billion dollars, and was seeking $3 million more, to establish what it calls a Policy Analysis Market. It would have offered, among other things, “futures contracts” on terrorist attacks, political assassinations, military coups and the like.

Only when Senate Democrats got wind of this repugnance was something done: on Tuesday, talking as if butter wouldn’t melt in his mouth, Deputy Defense Secretary Paul Wolfowitz airily admitted that he’d heard, or read in the papers, about such a thing. With a wave of his hand, Wolfowitz declared the program, was dead. In his heart of hearts, he’s hoping that was the end of any talk about it, too.

He’s kidding himself; the death and destruction pool will be among many issues of Campaign 2004.

The scheme would have been a sophisticated version of the office pool: pick the world leader most likely to be deposed or murdered, name the next place to be blasted from the face of the earth, and guess which gang of sociopaths will do it. Guess what nation will start the next war. The odds, presumably, would depend on your geographic or ethnic choice; the more unlikely the target, the wealthier you might become by choosing him, her, or it.

And what does this sports wire for the weird have to do with national defense? Well, went reasoning, a rash of bets on an assassination or a terrorist strike might lead to information on such a thing actually happening, and give the Forces of Good a chance to prevent the evil occurrence.

While analysts do do this sort of thing, though without the gambling, it seems that such a pool would, in effect, be placing a bounty on certain illustrious individuals or making a target of some noted edifice or grand event.

Making money on murder and mayhem is the American way, isn’t it?

[Vapour]

I don't think the Adminstration has anything to do with this plan. As distasteful as it sounds, this is actually valid idea. It's a pitty that plan didn't go through.

Consider it as future market on security matter rather than gambling den on other people's misery. True, if you are a member of Al Queda or happen to know inside information of these group, you could make killing (finalcially). But American intelligence gain useful warning so it is a good trade off if the priority is security. And if you are the person directly responsible for atrocities or assasination, you are unlikely to make the bet.

[tweety]

I think it's a brilliant plan. You are correct is talking about it as a futures market, the problem is that 99% of the world does not understand how a futures market works. This can be seen in the use of the words "bet" and "gamble". The interesting point is that the fears you and others have of terrorists profiting of this are actually irrelevant. Terrorists already can, and have done this. Although it was not conclusively proven, there is a large amount of evidence that someone 'in the know' about 9/11 bought a boat load of airline puts (a financial derivative that increases in price as the underlying stock decreases in price) at the exchange I traded in at the time. If you look at the volume traded compared to historical numbers it's obvious there was something fishy going on.

In general, markets are amazing devices for information discovery. There is no better way to get the best, brightest, and most informed in a particular field to work 24/7 (in the most efficient manner possible) than to create an incentive, something the government is notoriously bad at.

Not even to mention the use they could have with insurance companies laying off some of the risk they may have in terrorist attacks. Allowing people to purchase insurance at a lower price (or at all). How much more likely to you think it would be for American companies to invest resources in developing countries, or countries with shaky political ground, if they could hedge the risk the same way that airlines or UPS hedges fuel price risk.

f****** Brilliant.

It's a shame really that most people in the world are not educated in how a market works. This was a great idea, the "think outside the box" approach we need in the modern world. It was cut down by ignorant knee-jerk politicians who run the government without understanding the underlying philosophy and ramifications thereof.

I wish that I had thought of it first, I would've written an honors thesis on it. If I had thought of something like that I probably would've not gone into the private sector and would have made a long and fruitful academic (and consulting ;) ) career out of it.

In other words: "I'm a big fan"


(As a note: If any of you are teachers, I have a very simple and fun exercise in order to show people how a market works. I did it in my first econ class in college but it's simple enough for 5th or 6th graders to do. PM if interested)

If I'm a little incoherent it's because I've been up all night trading worldwide markets.

Steve Kovalcik

[larsen_huw]

Not wishing to lower the tone ... BUT ...

Can i have twenty bucks on the French! :D

[A. M. Jauregui]

Sigh politicians...

If so much money was sunk into the project (“has spent half a billion dollars, and was seeking $3 million more“) it would have been far better to push it through and see how well it could have worked. Markets have some real predictive abilities...

Steve do you mean the exercise that uses playing cards and graph paper to find market equilibrium?

[Ben Bartlett]

It may have had wonderful predictive abilities, but diplomatically speaking, it was a really stupid idea. I mean, what would we think if, say, Iran started a futures market on when President Bush would be assassinated? It was an expensive bit of foolishness on the part of DARPA, but, on the upside, it did lead to the resignation of John Poindexter, one of the worst appointments the administration has made, so there really is a silver lining.

[Jack B]

This actually sounds like a brilliant "trial balloon" strategy. Imagine we have the futures market. When we see a quick spike in the parimutual odds on a particular terrorist act, we can assume the "money is in the know" and, BINGO we are forewarned! This is more like betting on the horses, when you hang back and watch for a late shift in odds as the smart money goes down. It could have worked. I certainly hope that's what they had in mind....

[heatMiser]

The program is based here in Dublin, as it was designed as an online gambling thing. The scary part is that it was designed as a way of predicting future terrorist attacks. As if the punters ever come out ahead in the betting world?

[koma]

I'm with Aaron on this one. This was a total waste of taxpayers money on a venture which if not moraly wrong, would be a diplomatic nightmare, and those responsible should be held accountable.

There are so many things wrong with this plan, not the least of which is the possibility of "fixing the game"! And don't think it isn't possible! It is!

When I first heard about this my jaw dropped to the floor and the heathen in me wanted to grab any nearby politician by the ear and drag him to the nearest tar pit and yes, carry along a feather pillow and a rail. :mad:

[Vapour]

In future market, you can make profit by selling (betting for the president NOT being assasinated) as well as buying (betting for the president being assasinated). That is why it is inappropriate to describe this project as gambling on someone's misery. It would have been brilliant but they had to shoot down the messenger. I would love to see the odd on, say the likelyhood of House of Saud being toppled.

Cornering market never really work except inside trading but inside trading is exactly what Pentagon is counting on. As of Pentagon fixing the market, this is not for profit operation.

I hope someone else pick up this project.

[tweety]

Ana,

The game I was taught is different. I like it because the kids can simulate a real futures market with as much open-outcry and hand signals and chaos as the teacher can tolerate. This is the basic version (it can get more realistic, but this is enought to see the 'magic' in the market): Cut out little slips of two colors of paper. Distribute these strips UNequally (in color distribution and number) to the class. Do not tell them how many of each color or the total number in circulation. Tell them the object is to score the most points where points = color A strips held x color B strips held. Allow them to open-outcry trade the strips in whatever way they like. For example:
"I'll trade 3 green for 1 red"
“How about, 1 red for 5 green”
“4 for 1”
“Okay”
And so on…
Allow them to continue trading until no one wishes to trade anymore. The final price quoted will be the ratio of color A to B.

In other words, no agent has any idea of the correct price (ratio), but the market will "find" it. I was in college and I thought it was neat. Everyone talks about the invisible hand of Smith and we all are told the market works, but to see it is nifty.

As a note, this game obviously has many simplifications but one I feel one I need to point out is this: This game assumes that everyone has the same utility (points) formula. In reality every agent has a different formula to compute points. This is what truly makes the market great. Most criticism of capitalism, in general, results from people not understanding this point.

-----

As for most of the other posts: I believe a second read of my original post may be in order, particularly the bit about the potential benefit to the people of these unstable nations and business investment and the bit about trading firms of experts.

Also, there is a difference between betting and trading. Only a very small portion (very small) of the market is betting. Speculation is a zero-sum game (or less than zero with costs), while trading is a positive sum game. The market CREATES wealth. It does not just allow it to change hands. I think misunderstanding of this point is exactly where most people derive their other misconceptions of markets. See game above (price discovery) and comments about hedging risk of previous post.


Steve Kovalcik

[A. M. Jauregui]

The one that I believe I did in class was Trading in a Pit Market (http://www.people.virginia.edu/~cah2k/pitmkttr.pdf) (a pdf) which is meant to teach market efficiency... I was really surprised how "efficiently" the numbers worked out.