The market of the future

FRAMINGHAM (10/08/2003) - When the press caught wind of the Pentagon's proposed FutureMAP initiative (also known as the terrorism futures market), an initiative that would create an online site where members could bet cash on when and where they thought terrorist attacks would occur, the program was quickly squashed. Members of Congress, such as Sen. Byron Dorgan of North Dakota and Sen. Ron Wyden of Oregon, chimed in to label the idea "unbelievably stupid." Terrorism might be a tasteless application of the idea, but futures markets have been used to successfully predict both elections and sporting events. Economists see them as having tremendous potential to measure the likelihood of future events.

The concept behind an online futures market is as follows: Participants select an event they want to bid on. Wagerers who agree that this event will happen purchase contracts. The more contracts they buy, the more they agree with the events' occurrence. The Pentagon's Defense Advanced Research Projects Agency, or DARPA, regarded this as a way to gather opinions from a variety of people around the world.

Eric Zitzewitz, assistant professor of economics at Stanford Graduate School of Business, believes these markets can be powerful because of their ability to aggregate random bits of information in one location. But Michael Salinger, professor and chairman of the department of finance and economics at Boston University, is not sold on the idea. Salinger thinks that if a person has any inside knowledge, he would be foolish to trade it in a public area, especially if being the owner of that information could jeopardize one's career--or in the case of terrorism, one's life.

A success story for the predictive power of online futures markets is TradeSports.com, a Dublin, Ireland-based online trading exchange. TradeSports.com CEO John Delaney calls his market a person-to-person trading exchange. Its 21,000 members can trade contracts on the occurrence of a wide range of events. Currently, there are more than 1,200 contracts on TradeSports.com, including the outcome of major league baseball and NFL games, but also the capture of Osama bin Laden and the likelihood that the U.S. terrorism threat level will hit red by December 2003. Delaney has lots of confidence that his members can help predict the future. "Our belief is that a real money opinion poll more often than not will get better information than a simple poll where people don't have any financial interest," says Delaney.

Online futures markets may not be a scientific sure bet, but it's hard to imagine that when it comes to predicting terrorism there will ever be surety. Perhaps glancing over what members of these markets are predicting isn't such a bad idea.

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