Futures market in terrorism

hi all

ok, this has been confusing me since I first saw it mention: a proposed (and now scrapped) futures market on terrorist incidents ect. Ok: wtf?!? Am I the only idiot that can’t understand how you could have futures on this? My understanding was that futures basically predict something like currency fluctuations, on the basis that eventually the currency future would be purchased by someone who wants to purchase currency. Are people purchasing terrorist incidents??? Does anyone else just not get this?

any help would be fantastico.

cheers all!

I recently heard the idea is resurfacing. And it’s not a terrible idea. Evidently only government intelligence agencies around the world are involved, not us normal folk.

The idea is to buy shares of “plot to blow up Statue of Liberty” etc. If The event pans out, you make money. What if a terrorist in Israel is captured tells authorities he’s heard of such plot, and similar information is found in the house of a terrorist raided in London. Pakistan arrests a few Al Queda who give up information as well. Well intelligence agencies in London, Israel, and Pakistan may go buy stock in the Statue of Liberty being attacked.

The monitors of the exchange can look at the market and see that all of a sudden 100 agencies around the world just bought shares in the plot to blow up the Statue of Liberty which means that a lot of people think it is going to pan out. It’s a way to get all homeland security agencies around the world on the same page - a way to share information without ever actually having to call each other. Goverments can then either go protect the Statue or try to find out who’s behind the plot.

It’s based on gaming theory. The idea is that you get together a bunch of people who each know a little bit about something, and collectively they can figure out most likely scenario.

It’s not a bad idea, but the concept of people betting on terrorist attacks like they were sports matches or something was just too distasteful for the public to tolerate.

It’s not just distasteful; there is the very real possibility that an organized wide spread terrorist group could manipulate such a market to both mislead government intelligence sources **and ** [sick pun alert] make a killing on it to finance other attacks.

OK, Blow Up Statue of Liberty (BOSoL) is receiving widespread bidding. Homeland Security surrounds it and nothing happens. How does anyone cash in?

Or, BOSoL is bid up and carried out. Where does the money come from when the various “in the know” agencies claim their pay-out?

Or, Sneaky Agency A (up till now non-terrorist) bids on BOSoL; then blows it up and cashes in.

I’ve wondered about this just like the OP, and haven’t seen a decent description of how it would work. Questions like this come to mind and don’t get answered. Clarification, anyone?
Another, after the first scenario (Homeland Security stops BOSoL, no pay-out), the agencies are hearing about BONF (Blow Up Niagara Falls) and it gets bid up without much enthusiasm. HS realizes the futures market won’t work if they stop all the BOs and prevent the pay-outs, so they let BONF happen. --then to bolster the image of the futures market, they explain they knew it was going to happen. The citizens (a) are proud that the futures market keeps the authorities informed, (b) grumble a little, or © say the HELL with the whole war on terrorism and everyone stops paying taxes.

I can see how they might user the market to a) mislead intelligence, or b) to make a killing, but it seems to me that the two are mutually exclusive - either one or the other, but not both.

If a group wanted to mislead, it would have to purchase futures in something that wasn’t going to happen, therefore losing that money they invested. And if they wanted to make a killing, they’d have to invest in an idea that they were planning, thus tipping their hand to intelligence. I’ve heard this compared to the idea of intelligence paying money for data.

The whole idea is interesting to me, but I don’t think it would be effective. It seems like it would be more likely to reflect the current concerns and fears of the general population than to highlight info from people who are actually in the know.

This is not something I thought up; I heard a futures market expert discuss it. I’ll try to describe it, but I am a bit hampered by not knowing exactly how this terrorism futures market would work.

There a two scenarios on the board, blowing up the Coit Tower and blowing up the Trans America Building.

Rumors start circulating that there will be a bombing in SF; everyone, including the terrorist financiers, buy futures in both. The prices go up on both.

Then terrorist informants start mentioning half heard rumors and stray facts that strongly indicate the Coit Tower; word gets out, security at the Coit sky-rockets, the price of Coit bomb futures sky-rockets.

And Trans America bombing futures plummet, because every-one thinks they know which building is the real target.

So the terrorist financiers sell the Coit futures, buy the Trans America futures, and blow up the Trans America.

This would take organization, careful planning, an ability to use followers as unknowing pawns, and nerves of steel.

Couldn’t such terrorists be identified by such market manipulation? Couldn’t the market refuse to pay up to suspected terrorists [Actually, I have no idea]? Well, if that happened, who would gamble in the market if being right meant being branded as a terrorist financier?

The person I heard explain it was much more elegant.

Did anyone posting after Bob55 and Diceman read their posts. It isn’t really mooted that terrorists and their financiers would be involved in this market, after all they would be easy to catch when you have their name and address.

Yes.

Bob55:
Everything made sense until

Wait a minute; why not just call each other? One thing all sensible governments should be able to agree on is inhibiting extra-governmental power and violence. And if they don’t, they could manipulate the boards. Substitute ‘hostile governments’ or, better yet, ‘hostile persons in governments’ for terrorists.

Diceman:
My point was some object to the idea for reasons other than ‘distaste’; [just like feeding livestock rendered animals].

I am not confident that ‘goverment intelligence agencies’ and ‘terrorist financiers’ are mutually exclusive groups.

Nor I am convident that “terrorists and their financiers … would be easy to catch when you have their name and address”, or that you would have individuals names and addresses.

Further clarification: I thought it was a clever and elegant (and creepy and distasteful) idea when I first heard it suggested.

And while all attention is diverted towards those two buildings, another terrorist organisation (more interested in advancing their agenda than making money through the future scheme) could more easily blow up something else.

I believe this thing is utter crap

It works under the (flawed) assumption that all parties involved (terrorists, secret services) will play by the book, or else it is doomed(as I mentioned in my post above.

I admit that I grossly oversimplified things to answer to answer Curt’s question as to how hostile persons inside or outside of a government [to take into account Bob and don’task’s objections] to **both ** make money and mislead using the board.

If I recall the details correctly, no real money would change hands- it would be theoretical money, or points, not cash. Second, it wouldn’t be open to everyone, just the people who worked in the field, and the state of the terror market was not to be public knowledge.
Apparantly, some companies have tried something like this- ie have all the sales executives “bet” on something- ie future sales, and discovered that the predictions of the betting pool as a whole were more accurate than the predictions of any individual involved.

Removing money from the equation would remove much of the danger (as well as interest). But the potential for abuse still would be enormous.

Does any one have a link to any current details of the plan?

Well sometimes even agencies within our own country cannot call and share information about terrorist attacks (FBI & CIA), so I doubt gathering info from the goverment of Zimbabwe is any easier. This way if Zimbabwe hears of something small they don’t have to call 200 other countries I guess.

Some interesting exploitations were brought up, but from what I heard (a news radio source) only government agencies would be involved, not everyone.

Here is an interesting quote from this site:

Oh, I am perfectly willing to accept the theories, and, as I said, I thought the idea had merit at first. In fact, I still kind of like it in a dark sort of way.

However:
The reason “even agencies within our own country cannot call and share information about terrorist attacks (FBI & CIA)” is because of some nasty abuses of that information by those agencies in the past. So I don’t think that opening the market only to government intelligence agencies will prevent abuse.

Futhermore, the “…markets['s] … extreme… efficien[cies] at aggregating information from all investors—including inside information …” has been known to fail spectacularly at times. I do appreciate that the markets’ overall performance averaged over time is pretty good, but then so have been more traditional means of gathering and analyzing intelligence. ‘Overall’ is little comfort to the small Enron shareholder.

Again, I just wish to make the point that there is a valid objection other than distaste.

I imagine the three big responses to that are that if the markets are thick then they’re difficult for a small group to manipulate, to get a group big enough to manipulate a market will expose the organizers to great risk, and any small group w/ enough money to manipulate the market will automatically become suspects when the market points one way and an attack comes from the other.

Rumor has it that the Iowa Electronic Markets are pretty good at predicting elections & stuff.

I can certainly explain how it would work in theory and opine about whether it would work in practice given different scenarios. I’m a futures trader and used to make markets in anything and everything (and made a killing on the OJ verdict).

Every contract would have a set of specific conditions/events that must occur or not occur by a given date. If the terms of the contract are “met,” the seller of the contract owes the buyer $100 (or points if hypothetical). If the terms aren’t met before expiration then the seller owes the buyer nothing and the buyer loses the purchase price.

Let’s say that there is a contract whose terms are: There will be a terrorist* attack on a US territory of the magnitude of at least $20,000,000 dollars worth of damage as assessed by three independent auditors before midnight of 12/1/2004.

*whether or not it’s a “terrorist attack” will be determined by a pre-selected board of 9 experts on terrorism.

So market makers and speculators (and even hedgers possibly) auction the current price to $45. This means that the current market estimates a 45% probability of that attack happening. If CIA analysts agree with that assessment they do nothing. Since Tommy Terrorist has his hand on a detonator that’s about to do a lot of damage, he may buy futures knowing that the probablility is closer to 100%. If Ichabod the Investigative Reporter does his homework and get’s good info that there will be a terrorist attack he might be willing to buy the futures up $60, prompting the CIA to ask what does someone know that they don’t. If the buyer buys at $45 and the bomb meets the criteria, they receive $100, making a $55 profit per contract. Since the futures contract offers information that will effect the likelihood of it coming true, the futures price will have a discount related to how effective the market believes that the government is at stopping it.

Now here are the potential problems:

The biggest problem is liquidity and the effect that has on the accuracy of the assessment. Not allowing everyone to participate severely limits the liquidity and therefore the prices reflection of the true market value. Many highly commoditized markets fail miserably as it is --this one doesn’t have a chance to overcome the potential margin of error due to poor liquidity.

If you don’t make it for real money then people are typically much more willing to take long odds thus throwing off the results. Asking someone to put their money where their mouth is has a remarkable effect on objectivity.

Terrorists won’t participate for fear of being trailed.

I’ll make a market right now that if this market is started by DARPA, it will be deemed a failure/discontinued within 2 years. My bid/offer is 90-97.

Thank you.

Surely investment groups would be formed to minimize individual risk in such a sensitive and volatile market, and my Proposed Terrorist Masterminds could hide in a seemingly innocent Terrorism Futures Investment Club?

Doubtful if DARPA is the clearinghouse. $2.5 million dollars in profits from UAL puts purchased just before 9/11 still remain unclaimed, most likely because of where the paper trail leads. If terrorists could successfully bet and collect on a bet in the future it would be in the stock market where there is more than sufficient liquidity and some degree of plausible deniability.