Terrorism futures are back

Yes, those terrorism futures, here is a story from cnn.com. The old group, Net Exchange, is behind the current revival, but this time without a Pentagon connection.

The idea is being marketed as a research tool:

In response to the highly charged criticisms that ended the Pentagon’s association with the project, Polk [a Net Exchange spokesman] noted the market is designed mainly as a research tool, not unlike the Iowa Electronics Markets, which have done a pretty good job of predicting the outcomes of presidential elections.

“It is potentially an interesting alternative to Gallup polls or to specialists reporting from the region,” Polk said. “It’s a way of going directly to individuals in the region or outside who have knowledge or interest in the political and economic events in the area.”

Polk said Net Exchange would initially limit the amount of money traders could invest in the market, so that people won’t be profiting from violence or upheaval in the region.

What’s more, the futures contracts would be based on general questions, such as the likelihood that the King of Jordan will be overthrown at some point during the second quarter of 2004, for example, rather than on specific acts or events, which could lend themselves to manipulation by terrorists.

My prediction: These markets require legal tolerance, given that they otherwise violate anti-gambling rules or fall under regulatory jurisdiction. I’ll bet that this revival is shut down pretty quickly.

My view: Most of the movements in asset prices are noise, rather than based on fundamentals. The main problem with the idea is that the price movements, even if “unbiased” in the mathematical sense, feed us a steady stream of misinformation about world affairs. I also could imagine public panic resulting, or bad events being accelerated into greater likelihood, imagine how Jordanese politics is altered if the betting market says the King of Jordan is a goner.