Betting on Terror: What Markets Can Reveal Anyone looking for a good bet last week was offered one by an online futures exchange: Would John M. Poindexter, who heads the Defense Advanced Research Projects Agency, a research arm of the Pentagon known as Darpa, be able to keep his job after the furor over the aborted plan to start a market that would trade terrorism futures? Within days, the answer appeared to be that he would not, as Defense Department officials said Mr. Poindexter would resign within a few weeks. Assuming he does leave by the end of August, some lucky traders stand to make more than 10 times their investment. If that bet was not to your taste, there were plenty of others available. Would weapons of mass destruction be found in Iraq by the end of September? Would Saddam Hussein be captured? How about Osama bin Laden? Would the terrorism alert level in the United States be raised or lowered? Will Kobe Bryant be convicted? The existence of such contracts raises perhaps the most overlooked question of the debate on the proposed Defense Department project, the Policy Analysis Market, which would have allowed people to speculate on such issues as whether there would be an increase in terrorism or a collapse of the Jordanian economy. Why was the government needed to get this market going? The answer is that Uncle Sam had been picked to play the role of designated loser in the gambling. The existing place to make such bets, www.tradesports.com, is an Irish market that can be traded by anyone with a credit card and an Internet connection. There are no market makers, just traders online around the world. Tradesports dreams up contracts based on what it thinks might be interesting, and puts them up for trading. But it does not guarantee that you can find someone to take the other side of your bet. The Policy Analyst Market was going to do just that. The market maker was to be a computer, financed by the government, that was willing to offer a price for any wager on a subject within its bailiwick. If bettors wanted to wager a lot of money on something, the computer would steadily raise the price. One possible wager that was mentioned by Charles Polk, the president of NetExchange, a San Diego company that proposed the idea to the government, was on whether Hamas would join the Palestinian Authority government, a move that he took for granted would indicate it had renounced terrorism. The market-making computer was supposed to be willing not only to take bets on that, but on such related topics as whether the Jordanian economy would boom if that happened. One risk to the market maker would be insider trading. Somebody within Hamas could make some money by placing bets before the decision was made public. That would be all to the good, as Mr. Polk saw it. "We welcome insider trading," he said last week, since it would move prices and send a signal to the Defense Department, and anyone else watching the market, that conditions were changing. By being willing to lose money on the market maker, the Defense Department would be able to get information. One reason some people thought the whole idea stupid was that betting on an increase in terrorism might be a losing bet even if it turned out to be a winner. "Isn't that going to guarantee a knock on the door by the Feds?" asked James Chanos of Kynikos Associates, a money manager who specializes in selling stocks short � that is, betting that a stock price will decline. He recalled the search for evidence � ultimately unsuccessful � that terrorists might have shorted stocks before the Sept. 11 attacks. The people who designed that market thought of that possibility, and proposed that the names of traders be kept secret from the Defense Department. Want to bet whether that secrecy would have been maintained if there was a new terrorist attack? And anyway, said Robin Hanson, the assistant professor of economics at George Mason University who dreamed up this idea and persuaded NetExchange to propose it to the Defense Department, there were plenty of bets that would not offend the government. "The F.B.I. would not knock on my door," he said, "if I bet that if we invade Iraq there will be more terrorist deaths in the United States." For now, the idea is dead, with the Defense Department having abandoned it quickly once the public ridicule began. But Professor Hanson has not lost hope. "I think sometime in the next 10 years, this technology will be applied somewhere," he said. It would not, he said, have to be a public market. Perhaps, Professor Hanson mused, it could be open only to employees of the Central Intelligence Agency, who would place their bets and, in the process, let the government know what consensus there was among intelligence professionals. That, he said, could sometimes be different from what the top of the agency was saying. For example, it would be interesting to see how likely the lower-level intelligence analysts think it is that biological, chemical or nuclear weapons will be found in Iraq anytime soon. http://www.nytimes.com/2003/08/03/weekinreview/03NORR.html