Herding Cats

Pentagon Succumbs to Public Pressure

Upon first reading about the Pentagon‘s “Policy Assessment Market (PAM)” a futures-trading market to price the risk of terrorist attacks, I took the concept at face value and was disgusted by it. The thought of making a game out of a subject as weighty as the terrorist attacks appalled me. However, I did wonder at the fact that the idea came from the US Department of Defense rather than from the likes of a high school reject with too much time on his hands and an urge to play with the emotions of thousands of Americans affected by the attacks on our country. So the WSJ commentary on the PAM really caught my attention.

After what I’ve read, I can see both sides of the issue and I would only argue that the idea should have received more consideration and that it is a shame that Admiral Poindexter had to resign due to the negative publicity associated with it.

However, I also note the following:

I have to say this is one business idea with a purpose even I approve of, mainly because it adds value apart from earning profits and making rich people richer. The program’s chief purpose lies far from making money – instead, it aims to improve our nation’s security. Any plan that has a chance of making America safer deserves a fair hearing. After all, what better way to learn people’s strongest convictions than by, as the saying goes, forcing them to “put their money where their mouths are.” In the PAM, real money would be at stake, meaning informed participants may reveal knowledge they would otherwise keep secret. Analysts could then sort through the noise, focusing on spikes in locations, dates or situations of high vulnerability.

It seems that the Pentagon’s plan was primarily foiled by poor public relations; in my mind, this is clearly not a sufficient reason to abandon an idea. Within a day of disclosure of the program, public and Congressional outrage reached such a high level that that the Defense Advanced Research Projects Agency (DARPA) killed the program and Admiral Poindexter was forced to resign. Many politicians called the program immoral and grotesque, “a market in death and destruction.” However, intelligence gathering has always been a dirty but essential business that uses tactics that are often far less appealing than this market idea. As PAM’s founder, Robin Hanson, points out, “The nature of intelligence is that you are paying people to tell you something unpleasant. But if you want information about such things, I don't see how [PAM] is morally better or worse than any other way of paying for such information."

And isn’t the program merely an amplification of the service market participants already provide to the defense department? Right now, when estimating the probability of events like terrorist attacks, the Pentagon considers market data like oil price futures and currency exchange rates to understand how the market assesses the risk of political instability. And, because of the whole “money where your mouth is” concept, the markets do a fairly good job. A market set up to forecast the political instability that leads to terrorism would merely clarify the predictions that can already be interpolated from our basic markets.

Another argument relates to the actual level of insight that most participants would bring to the market. Why should the defense department believe Joe Smith’s opinion on the likelihood of terrorist attacks? The point that supporters of this argument miss is that the program might actually reduce this exact problem! Wouldn’t the fact that money must be placed behind bets actually serve to weed out a few uninformed participants? I’m sure that rumors fly into the defense apartment right now, when all it takes is a telephone call or an email. Forcing people to put money behind their convictions could really help the Pentagon filter through distracters to get to the people with the real information.

But couldn’t terrorists use the market to bet on their own future activities and, as a result, actually use Americans’ money to fund their attacks? This is a truly horrifying notion; however, in the proposal, the maximum gain from a trade was capped at $100 – hardly enough to make a difference in terrorists’ fundraising activities. Once again, the purpose of the program is protection, not profits. And perhaps even more importantly, the system would obviously be able to track down all participants. If a speculator made a huge gain, you better believe the CIA would be all over them.

Don’t get me wrong -- I do still have several concerns over the program. Without the proper security measures, the program might leak America’s insights on the probability of terrorist attacks to the terrorists themselves, influencing their plans. Also, should our nation’s defense program rely entirely upon the efficiency of markets? Probably not. And what about issues of moral hazard? However, regardless of such concerns, I think the idea was a credible one deserving of more than two days of consideration.

Pros and cons aside, the decision to cancel PAM seems to be a purely political one. I’m particularly disappointed to hear that the Pentagon simply bowed down to public pressure. The Pentagon’s purpose is to protect our nation, not to win a popularity contest with judges like Hillary Clinton. Admiral Poindexter stepped down from his position, largely as a result of this incident. Yes, his “Total Information Awareness” program did win the 2002 Worst Technology of the Year award, but the Bush administration is still backing that plan. And have we forgotten Thomas Edison’s several thousand failures before he was able to find the right filament to place in a lightbulb? As Charles Kettering said, “An inventor fails 999 times, and if he succeeds once, he's in. He treats his failures simply as practice shots.” Poindexter is an inventor of sorts and someone with his knack for innovation could surely have come up with many other useful defense techniques for our nation. It’s a shame that we’ll never get to find out.

Finally, the concept of applying a business concept to the defense world is, if nothing else, intriguing. In the political world, the results of similar online betting on elections actually proved quite trustworthy. These markets provided better forecasts than pre-election polls. Indeed, it’s only logical that people would be more willing to give their opinions to pollsters if they could personally profit off of it than if their dinners are disrupted by ringing telephones and doorbells. After all, online betting (which today spans from the Iowa Electronic Markets where you can bet on elections to the Hollywood Exchange where you can bet on Emmy nominees and the success of various films) is rather like reality TV for the internet, isn’t it?

Posted by april at August 1, 2003 05:50 PM