I read an interesting, albeit a little morbid article from http://economics.about.com/b/2003/07/30/a-futures-market-on-terrorist-attacks.htm on a proposition of a program to induce a futures market based upon the probability of a terrorist attack on certain locations. In simpler terms, an idea was created to have people make bets upon the chance of a terrorist attack happening. Although the idea seems strange and morbid, I have to agree with the author that it may help in reducing the threat of terrorism. Futures and options markets are highly efficient, and are usually good predictors of where the stock market is heading. If a futures market existed for say, the risk of a terrorism threat to the Pentagon, it could help the CIA and Homeland Security understand the reason for the escalating risk, and ultimately reduce the risk. A problem I see with the program is the difficulty in assessing the dangers of a terrorist attack. The futures market is very efficient because stock market investors have access to an enormous amount of information on individual stocks. Terrorist threats obviously don't have balance sheets, income statements, dozens of financial ratios, etc. to accurately assess risk. Well anyway, this program was eventually denied, but perhaps it should be given a second thought, if we can find a way to fix the problems.


Trevor said...

In the article linked in the post, the author says that betting pools are better predictors of election outcomes than election polls, and opinion markets are better predictors of future stock prices than the price targets set by individual equity research analysts. The reason, economists say, is that markets are extremely efficient at aggregating information from all investors—including inside information. If a futures market was established for terrorist attacks, it would be extremely helpful to agencies such as the FBI and CIA in their attempt to eliminate terrorism. The problem would be obtaining enough accurate and pertinent information to allow the futures market to be efficient. If someone could figure out how to ensure that all information concerning terrorism was available to the public, it would be a fanatic program. Until this is a possibility, terrorist attack futures markets will not be accurate and could be very misleading.

Calvin said...

I would have to agree that having more information on where a terrorist may attack would be helpful, and that it would obviously be a smart thing to build where that chance would be less likely would be a smart thing to do. The only question i have is this; is this seriously one of the biggest factors in the decision making process for a business?? It has been stated that the likelihood of a terrorist attack is extremely small and that in order to really make a huge affect on future markets, it would have to be a pretty dang large attack! Even the destruction of the Twin Towers wasn't enough to affect the market! At least not for very long anyway. It obviously had serious emotional affects on the country, but that wasn't enough to stop the invisible hand and crash the economy. If a company is so paranoid that it has to build in secret in the middle of the forest of something, it may need to reevaluate who's in management.

Dr. Tufte said...

-1 on Trevor for a spelling error, and -1 on Calvin for poor grammar.

This idea came out several years ago, and was quickly killed. Pity.

As an economist, it's hard for me to come up with a reasonable reason to be against this. For my part, I see insurance markets as already doing something like this.

I would not worry about the lack of information for this market. Putting money on these things will make a lot of people with information come out of the woodwork.

Liam said...

I would love to know how we could place a monetary value upon peoples' hopes, fears, and bigotry. If "peace of mind" was a potential market, I am sure the band Boston would have had it patented a "long time" ago. I am not sure how the returns on such an investment would turn out, considering the goal is to have as little return as possible, ie a terror attack.