Terror Betting Markets and the 9/11 Commission

Remember “terrorism betting markets”? The program was killed one day after it made headlines – so much for democratic inertia! Opponents plausibly argued that these markets made terrorism pay. According to a press release by Senators Wyden and Dorgan:

Terrorists themselves could drive up the market for an event they are planning and profit from an attack, or even make false bets to mislead intelligence authorities.

Of course, you hardly need terrorism betting markets to make money from terrorism; all you need to do is short the stocks of firms that will be adversely affected (say… airlines?). So if betting on terrorism scares you, you should still be scared! But before you start losing sleep, check out the findings of the 9/11 Commission. They find no evidence of 9/11-related stock market manipulation. Here are the two key passages:

There also have been claims that al Qaeda financed itself through
manipulation of the stock market based on its advance knowledge of the 9/11
attacks. Exhaustive investigations by the Securities and Exchange Commission,
FBI, and other agencies have uncovered no evidence that anyone with advance
knowledge of the attacks profited through securities transactions. (pp.171-2)

Highly publicized allegations of insider trading in advance of 9/11 generally rest on reports of unusual
pre-9/11 trading activity in companies whose stock plummeted after the attacks. Some unusual trading did in fact
occur, but each such trade proved to have an innocuous explanation. For example, the volume of put options–
investments that pay off only when a stock drops in price–surged in the parent companies of United Airlines on
September 6 and American Airlines on September 10–highly suspicious trading on its face. Yet, further investigation
has revealed that the trading had no connection with 9/11. A single U.S.-based institutional investor with no
conceivable ties to al Qaeda purchased 95 percent of the UAL puts on September 6 as part of a trading strategy
that also included buying 115,000 shares of American on September 10… The SEC and the FBI, aided by other agencies and the securities industry, devoted enormous
resources to investigating this issue, including securing the cooperation of many foreign governments. These
investigators have found that the apparently suspicious consistently proved innocuous. (p.499)

It is worth pointing out that even if the 9/11 Commission had found evidence of a terror/stock market connection, there would still be almost no case against the original plan for terrorism betting markets. The maximum bet was under $100. I like the economic theory of suicide as much as the next economist, but I still can’t imagine any would-be terrorist changing his mind over a Benjamin.

Thanks to my colleague and terrorism betting market lightning rod Robin Hanson for the 9/11 pointer. See also Alex’s short piece In Defense of Prediction Markets, kindly made available by Mahalanobis.

Evolution in One Lesson

Graham Bell may well have written the best book on evolution since The Selfish Gene. Most works on evolution are either overly speculative or incomprehensible to anyone without a degree in chemistry. Bell’s Selection: The Mechanism of Evolution hits a perfect middle ground, inter-weaving 175 central lessons of evolution with fascinating experimental details. Did you know that biologists have deliberately tried to breed the biggest mice on earth? It only took 35 generations to increase average weight by 7 standard deviations, from 25g to 43 g.

Selection reads like a well-organized treatise on intermediate microeconomics. It begins with the “Crusoe economics” of biology: asexual organisms. We can illustrate the basics of evolution using simple RNA viruses, and there are plenty of experiments that do so. If you want to increase the speed of reproduction, for example, all you have to do is put your RNA viruses in a resource-rich environment, and evolution does the work. After laying these building blocks, Bell branches out to more complex cases: selection on several characters, social selection, sexual selection.

Like a lot of good economics, Bell’s lessons are obvious upon reflection, even though few of us could have figured them out on our own. Here is a simplified version of one of his thought experiments on the advantages of sex:

Suppose there are three equally important genes. Designate the more fit allele + and the less fit allele -. You start with the following two strains: +– and -++. In an asexual reproduction, the -++ strain takes over, because it has two + genes and its rival only has one +. But with sexual reproduction, one-eighth of the offspring of the two strains are +++. The future is theirs.

And I thought Norwegians were so healthy…

On an average day, about 25 percent of Norway’s workers are absent from work, either because they have called in sick, are undergoing rehabilitation or are on long-term disability. The rate is especially high among government employees, who account for half the work force.

The average amount of time people were absent from work in Norway in 2002, not including vacations, was 4.8 weeks. Sweden, its closest competitor, totaled 4.2 weeks, while Italy came in at 1.8 weeks and Portugal at 1.5 weeks, according to the Organization for Economic Cooperation and Development.

Throw in vacation time (five weeks for most people), national paid holidays (11 per year) and weekends, and Norwegians take off nearly half the calendar year, about 170 days, a figure that does not include time off for disability and rehabilitation, according to Bergens Tidende, the newspaper that made the calculations. Long-term disability leave, up 20 percent since 1990, is growing at an even faster rate than sick leave.


There are few penalties for chronic absenteeism. Most people who take sick leave receive 100 percent of their pay for a year, though the level dips to 60 percent in the second year under a job rehabilitation program. Few employees get fired, but, if they do, unemployment benefits are generous.

The unions, by the way, claims there has been a “brutalization of the work force.” How so?

International companies, some of them American, have bought or merged with Norwegian businesses in the last decade, which has exposed workers to job insecurity for the first time. The unions contend that that has made workers reluctant to take sick leave when they should. Instead, they stay on the job and hurt themselves more seriously, which forces them into long-term disability.


Here is the full NYTimes story. Here is an earlier MR post explaining why the number of disabled in the United States is increasing rapidly. Here is the disability lowdown on the Netherlands.

New claims I do and do not believe

Do Not Believe: “If intelligent life exists elsewhere in our galaxy, advances in computer processing power and radio telescope technology will ensure we detect their transmissions within two decades.” Read more here.

Do Believe: “Napoleon Bonaparte was not murdered, but was killed by his overenthusiastic doctors, according to a study of records from the emperor’s final weeks.” Read more here.

Lance Armstrong Game Theorist

Armstrong’s victory in the Tour de France is a testament to his awesome physical skills but he and his team should also be credited with a sound understanding of game theory. Game theory arises in the tour because it’s important to take advantage of the draft created by riders in front. The dynamics of draft alone are fairly simple but add to this that the leader is not necessarily winning, the use of teams, the many stages, the different terrain etc. and you have a very complex strategic space. Correspondent Stephen Tuel writes about one episode of strategic biking:

The 18th stage was an excellent example of game theory at work. Lance Armstrong and the peloton were a few minutes back of a breakaway group of 6 riders (none of whom were a threat to the top of the overall standings since all were over 1 hour behind). Reading the various news reports and between the lines it appears that Armstrong’s team, US Postal, was doing all the work at the front of the peloton and the team of the closest competitors, T-Mobile, were loafing. (The crucial strategic variable in bicycling appears to be the effect of wind resistance, especially on the flat and on downhills–whoever is at the front has to work harder, and whoever is following can choose to conserve energy or share the effort.)

Armstrong and another rider (also over 1 hour behind in the overall standings) left the peloton, caught up with the group of 6, and helped them build a bigger lead. Once the lead started stretching, the T-Mobile team moved back to the front of the peloton and started taking their turns at the lead to help catch the breakaway group. Armstrong and his collaborator then relaxed, let the group of 6 go on (one eventually won the stage) and rejoined the peloton. By moving up with the breakaway group, Armstrong changed the payoffs which were letting the T-Mobile team slack off. Presumably, the continuing threat kept them working their share through the rest of the race.

See also this paper on strategic driving in NASCAR.

Addendum: Educated Guesswork and Evolution Will be Blogged chime in with another theory, Armstrong wanted to punish another cyclist for extra-curricular reasons. Interesting.

Look who’s scalping now

Recently, two major league baseball teams decided if they couldn’t beat scalpers, they would join them. The Chicago Cubs’ parent company established a corporation with the sole purpose of scalping Cubs tickets. The Seattle Mariners took a different, though similarly nefarious, approach. The team began facilitating the scalping of tickets on its website (where the team could charge a commission on the transactions) even as it hired off-duty police officers to enforce a local antiscalping law on the competition–the good old-fashioned freelance ticket broker…

It remains a puzzle why baseball teams ever prohibited scalping of tickets. Arguably they wanted to prevent their game from becoming seen as the province of the rich, which would have limited TV revenues in the longer run. Clearly the tide is turning toward more scalping and market-clearing prices. Why? Perhaps enough people are wealthy today that the reputational constraints are being relaxed.

Here is the full story, and thanks to Eric Crampton for the pointer.

Microsoft is selling Slate

Not only are they paying dividends, but they are seeking to unload the beloved Slate.com as well:

Microsoft Corp. is in talks with five or six potential buyers for its online magazine Slate, an executive said Friday.

Scott Moore, general manager of MSN Network Experience, which handles content for Microsoft’s MSN division, said the company is in early discussions with several media companies over a potential sale.

Moore declined to identify the companies, and cautioned that the deals might not come to fruition. “We’re at the beginning of the process,” he said.

Moore said Microsoft has been approached before about a possible sale of Slate, but this is the first time it is taking the offers seriously. He said Microsoft is especially interested in a deal that might allow it to create a partnership with another media company, which could potentially help increase advertising revenue on the MSN site.

The paper version of this article mentions The New York Times and Washington Post as possible buyers.

Here is the full story.

The bottom line: Slate will get worse. Current revenue is $6 million a year, the site breaks even, and visitor numbers are falling. Microsoft can treat it as a kind of vanity project, but trying to squeeze regular profit out of it is unlikely to succeed.

Slow medicine

Here’s another death of common sense story:

Would-be California medical students with learning disabilities filed a discrimination suit Monday saying their prospects of becoming doctors are being thwarted because they aren’t given enough time on the medical school entrance exam.

Do you remember the episode on ER where a patient was rushed into the hospital with severe head trauma and Doctor Green had to go to a quiet room to think about what to do? No, me neither.

(Not every doctor works in an ER but even general practioniers must think quickly if they expect to see enough patients to earn a good living.)

Even more shocking than the lawsuit is the response of the American Association of Medical Colleges. Instead of making the obviously correct argument that time is a legitimate testing hurdle for a physician they argue that the students involved are not disabled enough! If only they had failed more of their undergraduate classes then the AAMC would give them special accomodation. Really, I’m not making this up.

About the only saving grace in these stories is that the underlying assumption is usually wrong. Fact is, there just aren’t that many slow geniuses. Speed and quality of thought are correlated. (How else to explain my co-blogger? See here for more systematic evidence.) If there are other hurdles, these same students will soon be selected out. As a professor, I have seen this many times. Of course, that just means more lawsuits.

Thanks to Right Side of the Rainbow for the pointer.

Could the iPod fail?

Above and beyond the ephemeral value of superior style, what is the source of Apple’s long-term competitive advantage? True, they have more artists signed up, but this is likely a short-term phenomenon. And there is a more serious problem as well:

MP3s downloaded from Sony’s Connect service can only be played on Sony’s MP3 Walkman, and not on the more popular iPod (and vice versa).

Behind the scenes, the battle waging for commercial dominance is reminiscent of the early 1980s cut-throat competition to establish video standards between VHS and Betamax. And lest we forget, VHS won despite being technically inferior.

Although Apple has been the pioneer in the MP3 market, with Sony/BMG controlling 25 per cent of the music market it will be interesting to see whose digital distribution platforms will survive. Will all those expensive iPods we have been rushing out to buy wind up piled high in car-boot sales alongside Betamax video players and 8-track cassette machines?

Here is the full account.

Going out on a limb: I’ve never been convinced that the “iPod as we know it” could make money, especially once the market becomes more competitive for hardware. Right now the songs are being used as a loss leader for the gadget. And dare I cite Apple’s history of being a leader with ideas but failing to lock up the market? But hey, I’m the same guy who said the Dow was overvalued at 7000 and the single European currency would never happen.

Addendum: Andrew McGuinness recommends this reading on the topic, especially the excellent section five.

Socking it to us

The Bush administration has decided to consider a request from the domestic sock industry to impose quotas on imports of Chinese-made socks and will make a final decision on the matter just before the November presidential election, the Commerce Department said Wednesday…

“Urgent, significant action is needed immediately to save the domestic sock industry, the most competitive sector remaining of the once flourishing U.S. domestic apparel manufacturing industry,” wrote Charles Cole, chairman of the Domestic Manufacturers Committee of the Hosiery Association, and three other industry executives…

Cole, of the Domestic Manufacturers Committee, owns Alabama Footware in Ft. Payne, Ala.

From a CBS MarketWatch story. The administration has already imposed quotas on bras from China, despite the fact that there is no domestic bra industry to protect.

China is selling us a lot of socks (22 million pair in 2003 up from just 1 million pair a few years ago) for which I am grateful. I find that they go great with shoes from china.

Thanks to Marc Andreessen for the pointer.