By Arnold Kling
A number of economists and others are defending the idea of a futures market to predict terrorism. This idea was abandoned after Senators objected to it. Hal Varian writes,
The Iowa Electronic Markets has been predicting election results for 12 years using a system very much like the one that the Defense Advanced Research Projects Agency at the Pentagon proposed.
…As it turns out, these political stock markets provided somewhat better forecasts than polls right before the election — and they provide much better (and less volatile) forecasts several months before the elections.
The futures market in orange juice concentrate is a better predictor of Florida weather than the National Weather Service. The Iowa Electronic Markets outperform the opinion polls in predicting presidential election vote shares. Hewlett Packard ran a market forecasting printer sales that outpredicted any of its analysts. The Defense Department should be applauded for admitting to its own limitations. Last winter we studied a market in “Saddam Securities” that proved to be a good predictor of the probability of war in Iraq.
James Pethokoukis writes that the idea for the futures market came from Professor Robin Hanson of George Mason University.
As Hanson concludes in his analysis of these markets: “Betting markets, and speculative markets … seem to do very well at aggregating information. To have a say in a speculative market, you have to ‘put your money where your mouth is.’ Those who know they are not relevant experts shut up, and those who do not know this eventually lose their money, and then shut up. Speculative markets in essence offer to pay anyone who sees a bias in current market prices to come and correct that bias.”
Brad DeLong also has a series of posts on the subject.
For Discussion. What do you think of the idea of a terrorism futures market?