DOD's misguided bet on the future

TradeSports.com listing about whether or not Poindexter will still be employed at DARPA by August 31

The Defense Advanced Research Projects Agency's program to buy and sell futures contracts on potential terrorist events in the Middle East was publicized and promptly killed earlier this week, but the economist behind the idea said it could be used to benefit the government.

The Policy Analysis Market, which was set to launch Aug. 1 and was slated to be fully operational by October 1, was viewed by DARPA as a way of using the predictive ability of markets to anticipate terrorist events or other crises. Traders would have been able to place bets on myriad events, including whether Palestinian leader Yasser Arafat would be assassinated.

"The intent was to focus on big, aggregate [events] in the Middle East, like a whole country over a period of time and the average level of its economy or growth of the military, and how that would impact military casualties in the [United States]," said Robin Hanson, assistant professor of economics at George Mason University.

Hanson said he created the basic concept and pulled together the team that responded to DARPA's original request for proposals in 2001. That team included Net Exchange, a market technologies company, and the Economist Intelligence Unit, a division of the publisher of the "Economist" magazine.

"There was no intention of trading in individual terrorist attacks," and the site would not have accepted more than $100 on any particular bet, Hanson said.

The market was based on the concept of "combinatorial betting," where traders bet on various combinations based on a set of events. For example, the question is if the United States were to pull its troops out of Saudi Arabia, would that increase or decrease the number of terrorist-caused deaths in the United States next year, Hanson said.

DARPA's piece of the market, the Futures Markets Applied to Prediction (FutureMAP) program, received approval from John Poindexter, director of the agency's Information Awareness Office. Poindexter was national security adviser to President Reagan and may be best known for his part in the infamous Iran-Contra scandal, and more recently for his leadership of the controversial Terrorist Information Awareness (TIA) program.

Poindexter was not leading the DARPA office when Hanson and his team responded to the original futures market RFP, but the retired Navy admiral is responsible for granting approval to all programs under his purview.

Defense Department officials said Poindexter is still a DARPA employee, but published reports say he will soon step down. TradeSports.com, a person-to-person trading "exchange," has listed a line on whether or not Poindexter will still be employed by August 31, and a similar site lets users bet on whether or not Defense Secretary Donald Rumsfeld will still be in his office on Oct. 1.

Hanson said the program was killed because of some "unfortunate examples used on the Web site," including the Arafat assassination, "which some Senators spun to betting on terrorism."

Sens. Ron Wyden (D-Ore.) and Byron Dorgan (D-N.D.) held a July 28 news conference where each blasted the idea. Dorgan said it was "incredibly stupid...[and] an appalling waste of taxpayer's money."

Hanson disagrees. "The combinatorial technology can be used for other things," including helping the government decide whether to approve a new drug by looking at whether its approval will increase or decrease the number of deaths over the next year, he said.

Meanwhile, the former Web site for the Policy Analyst Market is now blank.