Policy Analysis Market and the Political Yuck Factor
— why Americans shied away from a geopolitical futures market.
"Polls are one thing. but when people bet, where the money goes is often very revealing. People who are prepared to bet fairly large sums, and who wouldn't normally bet, often have very good reasons for doing so."
(Sean Boyce, Director of Communications, Ladbrokes)
Political analysis of futures markets is based on the common-sense principle that to follow the money is to follow the information. Frantic trading in American Airlines shares in the days before the September 11th attack on the WTC offered grisly confirmation of that principle — attempts to uncover the people or the sources of information behind those deals have universally drawn blanks. The Pentagon unit DARPA (Defence Advanced Research Projects Unit), almost immediately after the WTC attack, formulated a plan for an on-line market in Middle-East futures, hoping that the lure of massive financial rewards for correct bets on, say, the likelihood of a biochemical attack on Israel, would attract investors with genuine inside information.
The market, known as the Policy Analysis Market, or PAM, never got off the ground. Democrat politicians in the Senate uncovered the plan in July 2003 and it was dropped amid public outcry. Ron Wyden, a Democratic senator from Oregon, expressed the prevailing attitude when he said that "The idea of a federal betting parlour on atrocities and terrorism is ridiculous and it's grotesque."
Nine months on, and this condemnation is, in some circles, being re-thought. With the spectre of the Madrid bombings, continued unrest in Iraq and the threat of a major attack on Britain hanging over the public psyche, any source of information about "terror" cannot be seen to be ignored. The ongoing 9/11 enquiry in the U.S. has suggested that more vigilant market analysis would have indicated that some attack was in the pipeline, while a recent Channel 4 report on political futures markets showed that there is still some public interest in the idea.
On-line commercial betting exchanges have already cashed in on the concept of geo-political futures betting. Irish bookmakers Tradesports.com have been running markets on the survival of Saddam Hussein and Osama bin Laden, as well as the future of George W. Bush. More prosaically, the "Iowa Electronic Markets" apparently provide more accurate election result predictions than polls do, while, according to Robin Hanson, the economics professor behind the PAM scheme, weather futures markets are better at predicting weather conditions than the U.S. national weather service. This does not prove that a government-run geo-political futures market would be a useful source of security information. Indeed, George Soros describes the market as:
"a theoretical construction of great elegance that resembles natural science but does not resemble reality. It relates to an ideal world.it has little relevance to the real world. Market prices are always wrong."
However, given the caveat that market prices may always be "wrong" in that they will never truly reflect the "value" of a share or a product (although, according to Marx we ceased to accord products their true value when we stopped exchanging fishing nets for shoes on the basis of the time taken to make each), what market prices do indicate is the popularity of a product or a certain future — they tell us simply what the people who are investing actually think these shares are worth. In this way futures markets collate opinions, and somewhere in the mass of whispers that is "general opinion", there is more than likely to be some genuine, hard information about the probability of a certain future.
It is clear that, while futures markets can't be treated as a geo-political crystal ball, they do gather a certain amount of information, which is why political analysts in the Middle East, for example, do tend to keep an eye on oil markets. Many critics attacked PAM for being an expensive and ultimately an inefficient way to gather information. However, given our lack of knowledge about the information-gathering techniques of the U.S. government, any system which guarantees a certain amount of even whispery and vague predictive information must be worth a trial run. When we look more closely at the public condemnation of the PAM scheme in the U.S. last summer, it becomes clear that the potential effectiveness of PAM as a means of gathering information was not seen as the key issue. Some economics pundits slated the scheme for being unrealistic, but this was not universally agreed upon, as markets clearly do aggregate certain kinds of information. No, the outcry was based around the notion that PAM was an immoral scheme, something wrong and misguided and ultimately at odds with the American way of life.
Senator Byron Dorgan of North Dakota described PAM as :
"…the most Byzantine thing I have ever seen proposed by a federal agency."
while Senator Hilary Rodham Clinton added her opinion that it was:
"…a market in death and destruction, and not in keeping with our values."
Media coverage continued with the theme of moral disgust, with choice headlines like "Betting on Death?" and "Government axes online terror bets" focusing on the outrage provoked by PAM rather than on its potential effectiveness. So what is it about the Policy Analysis Market that could raise so much ethical condemnation in a country where holding non-American citizens without trial in Guantanamo Bay is seen as a realistic and justified response to the threat of terrorist attacks? Why was the Senate so appalled at the idea of "betting on terror"?
I would separate the mass of moral disgust surrounding the PAM scheme into three separate themes, all of which stem from an uncomfortable closeness to what is seen as "the enemy" in the search for information about unrest in the Middle East and its possible repercussion for the US.
First of all, the idea of a Policy Analysis Market shows just how closely intelligence services have to work with potential perpetrators of violence in order to glean any information at all about the likelihood of a terrorist attack. Many critics of PAM pointed out the fact that, if someone chose to assassinate President X, or arranged to have this done, then an on-line betting service would allow those perpetrators to collect a rich financial reward, anonymously, for their accurate "inside" futures prediction. What this criticism fails to acknowledge is that this in effect already does happen, as the trading in American Airlines shares in the days before 9/11 would testify. Furthermore, in the case of PAM, the information would be gathered for security purposes, and so a flurry of activity around a certain future would entail a step-up in relevant security measures. Of course, this would not be fail-safe; indeed, it is difficult to tell from fluctuating shares in a certain airline that someone wishes to fly a plane into a building, and so it would be just as difficult to pre-empt an attack on a public figure when the only information available is an increase in the value of a "future" in an assassination taking place soon. However, even this very little information is worth having, and the business of gathering information is generally a nasty and a morally dubious one. The public are mostly sheltered from the machinations of obscure Pentagon information-gathering units, and it would be a very safe bet to say that such units often work closely with groups that do not have U.S. interests at heart. It is only when such schemes are made public that the moral ambiguity inherent in political information-gathering becomes clear.
This moral ambiguity extends, not just to working with "the enemy" but to perhaps rewarding "it" as well. Hence the second moral problem, the idea that, if an assassination attempt was successful, the perpetrator could not only be satisfied with having carried out this, in his mind, politically necessary deed, but could also anonymously pick up a massive financial reward at the expense of the U.S. government. However, it is easy to forget that most information comes at a price. Robin Hanson, the economics professor behind the PAM scheme, said in an interview with the New Scientist that:
"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."
As a betting parlour, PAM offers potential financial reward for information. To worry about the prospect of "the enemy" being rewarded for having inside information is to miss the point of the whole exercise — in potentially winning these bets with the U.S. government, investors will be giving up that which is much more valuable — their inside information.
Which brings us to the third strand of the ethical "yuck" factor which the PAM programme gave rise to so publicly — the idea that, in providing the opportunity to win money on accurate futures predictions, DARPA would be inciting certain acts of terrorism, effectively luring them into existence. Democrat politician Tom Daschle voiced this fear when he said that:
"This programme could provide an incentive actually to commit acts of terrorism."
A San Francisco based blogger adds:
"Such golden opportunities to rig a market don't come up very often, and it's tempting to think of the DARPA experiment as a Pentagon-blessed life insurance scheme for would-be assassins."
Is this fear justified? From a totally meticulous viewpoint, it is clear that the possibility of not only carrying out an act of terrorism but also being richly financially rewarded for it would act as an incentive to some. However, terrorist acts can never, by definition, be purely motivated by the prospect of financial gain. It would have been an interesting day in the Senate if Mr Daschle had voiced this very same objection to the Iraq war rather than to the DARPA plan. It is so unlikely that a plan to assassinate George W. Bush would be inspired by the assassins' greed rather than their political motivations that this objection to PAM seems almost laughable. This unrealistic assessment of the potential dangers of the PAM scheme reveals an underlying fear of bankrolling the enemy while ignoring the complex mass of motivations behind any terrorist activity, reducing any stimulus for action down to bare economics.
At the end of the day, PAM was knocked down for its ethical "yuck" factor, rather than its effectiveness as a means of gathering information. We are fairly well shielded from the workings of U.S. and British intelligence agencies, so when a plan like PAM is revealed to the public in all of its morally ambiguous glory, it is unsurprising that the scheme is universally condemned. It is difficult to accept the fact that, in gathering information, intelligence units work with and often have to reward some of the very people they are trying to protect "us" from. General difficulty with accepting this principle has lead, in this case, to a perfectly viable scheme being abandoned. An inability to be open-minded, or even experimental, about the ways in which we define "information" and the means we will allow our governments to use in gathering it leaves us at a bizarre impasse. Perfectly legal currency speculation continues to unbalance the economies of developing nations world-wide, while an online geopolitical futures market, which could have had a useful informative function, is branded "immoral" and "not in keeping with our values". One can only conclude that "the American Way" is a very confused one.