[iwar] My article in Indian Express, Saturday, 09 August 2003

>From Ravi Visvesvaraya Prasad

My article in Indian Express
(http://www.indianexpress.com), Saturday, 09 August
2003

A Badla on the Lashkar e Taiba

By Ravi Visvesvaraya Prasad

Indian Express (http://www.indianexpress.com),
Saturday, 09 August 2003

The political furor which led to the resignation of
Admiral John M.
Poindexter and forced the Pentagon to abandon
launching an online
futures trading market in which anonymous speculators
would bet on
possible terrorist events should not eclipse what was
an unprecedented
attempt to understand terrorism by synergizing the
profit motives of
financial markets with innovative management practices
and advanced
technologies. India should immediately establish a
similar multi-disciplinary
 experiment to obtain fresh insights into predicting
terrorist attacks
on India.

The Pentagon developed Policy Analysis Market (PAM) as
“part of our
search for new ways to prevent terrorist
attacks...Futures trading has
proven effective in predicting events as diverse as
oil prices,
elections and movie ticket sales”. A senior Pentagon
official elaborated:
 “Research indicates that markets are extremely
efficient, effective and
 timely aggregators of dispersed and even hidden
information. Futures
markets have proven themselves to be good at
predicting such things as
elections results; they are often better than expert
opinions.”

According to its websites
http://www.darpa.mil/iao/FutureMap.htm and
http://www.policyanalysismarket.org, PAM would “trade
on economic, civil
 and military futures of Egypt, Jordan, Iran, Iraq,
Israel, Saudi Arabia,
 Syria and Turkey and the impact of US involvement
with each...The
creators of the market envision other trappings of
existing markets like
 derivatives.”

What got PAM into trouble were the events it was
taking bets on –
assassinations of Yasser Arafat and King Abdullah II
of Jordan, a
biological weapon attack on Israel, a nuclear missile
strike by North
Korea, etc.

PAM was an initiative of Admiral Poindexter, USA’s
National Security
Advisor during the Reagan presidency, who was
appointed head of the
Pentagon’s Terrorism Information Awareness program
after 9/11. It was to
 be launched on 01 August 2003 and was slated to be
fully operational by
 01 October 2003.

PAM was conceived by Robin Hanson, professor of
economics at George
Mason University, and was a joint program of USA’s
Defense Advanced
Research Projects Agency (DARPA) and two private
companies - Net
Exchange, a San Diego-based market technologies
company, and the
Economist Intelligence Unit, a unit of the British
magazine Economist (EIU
 has a large subsidiary in India and brings out
several reports on
Indian politics and business).

According to Brendan I. Koerner, Fellow, New America
Foundation, PAM was
 based on existing futures markets such as Iowa
Electronic Markets, in
which investors trade futures contracts on US
presidential candidates
and the US Federal Reserve’s interest rates;
Wahl$treet, a futures
market on German politics; the Irish betting portal
TradeSports.com,
which correctly predicted the date of Saddam Hussein's
ouster; and
Foresight Exchange Prediction Market where traders bet
on several types
of events, such as the resignation of Donald Rumsfeld
by October 2003.

Registered traders would deposit money into an account
and buy and sell
futures contracts on assassinations and coups in the
Middle East.
Holders of a futures contract that came true would
collect the proceeds
of investors who predicted wrongly. PAM’s websites
gave some blood-curdling
 examples:

Suppose a trader believes that Jordan’s King Abdullah
will be
assassinated within the year. Since she holds a
minority opinion, she
can buy a futures contract on Abdullah being killed at
a low price, say
5 cents. As more people follow her example, the price
of the killed-king
 future goes up, to say 35 cents. The payout if the
king is killed
within the year is a dollar, otherwise nothing. If the
king is killed,
the early investor makes a profit of 95 cents. The
later investors make
a profit of 65 cents.

Yasser Arafat is more likely to be assassinated than
Abdullah. You may
buy an early futures contract on this, at say 55
cents. As more people
begin to think like you that Arafat is going to be
assassinated, the
cost of the Arafat contract would go up, to say 85
cents. The payout if
he is killed is a dollar, otherwise nothing. So you
could make a profit
of 45 cents and the others who followed you could make
15 cents if
Arafat is killed.

On Monday, 28 July 2003, two Democratic senators,
Byron Dorgan of North
Dakota and Ron Wyden of Oregon, denounced PAM as
“grotesque” and “morally
 repugnant”. They added: “This encourages terrorists
to participate,
either to profit from their terrorist activities or to
bet against them
in order to mislead US intelligence authorities.”

Deputy Defense Secretary Paul Wolfowitz terminated PAM
and its websites
were deleted. Poindexter resigned after Senator
Barbara Boxer, Democrat
from California, demanded that Congress “end the
careers of whoever
thought this up.”

Several experts criticized the termination of PAM.
James Surowiecki,
financial columnist of New Yorker magazine and MSN’s
slate.com opined
that America would regret canceling PAM: “Similar
markets have proven
surprisingly good at predicting elections and
box-office sales. Orange-juice
 futures do a better job of predicting the weather in
Florida than
weather forecasts do…Even when traders are not
experts, their collective
 judgment is often remarkably accurate because markets
are efficient at
uncovering and aggregating diverse pieces of
information…It doesn't
matter much what markets are being used to predict.
Whether the outcome
depends on irrational actors (box-office results),
animal behavior (horse
 races), a blend of irrational and rational motives
(elections), or a
seemingly random interaction between weather and soil
(orange-juice
crops), market predictions often outperform those of
even the best-informed
 expert…It is reasonable to think a prediction market
would add to our
understanding of the Middle East.”

Surowiecki added: “PAM would also have been effective
because traders
have no incentive other than making the right
prediction for profit --
there are no bureaucratic or political factors
influencing their
decisions -- so they eliminate the hurdles that limit
information flow
within organizations. That's especially important in
intelligence. In 9/11
 there was lots of relevant information available
before the attack took
 place. What was missing was a mechanism for
aggregating that
information in a single place. A well-designed market
might have served
as that mechanism.”

Senators Dorgan and Wyden’s contention that betting on
assassinations is
 morally wrong is specious since existing currency,
stock and commodity
markets implicitly factor in such political risks.
Also, in a life
insurance policy, the policy issuer is betting that
you will die later
than you think you will, while for an annuity, the
issuer is betting
that you will die sooner than you think you will.

It is also specious of Wolfowitz to terminate PAM on
the moral grounds
that it was betting on assassinations when the
Pentagon has frequently
simulated the deaths of Indian leaders in
Pakistani-sponsored terrorist
attacks. A wargame recently conducted by USA’s Naval
War College began
with the following scenario:

The defeat of a new resolution in the United Nations
Security Council
calling for international involvement to resolve the
status of Kashmir
precipitated violent anti-Western and anti-India
demonstrations in
Pakistan. This was accompanied by a sharp increase in
Islamic guerrilla
activity in Kashmir, culminating in the downing, by a
shoulder-fired
surface-to-air missile, of an Indian aircraft carrying
India’s home
minister, defence minister, and army chief as it was
landing at Srinagar
 airport. “Informed reports” implicated the government
of Pakistan in
the shoot-down. India responded by launching Operation
Resolute Sword,
air and artillery attacks against targets in Kashmir
and northern
Pakistan suspected of harboring and supporting
perpetrators of violence
in Kashmir and the rest of India. The Indian
government issued an
ultimatum demanding the immediate delivery of
terrorist leaders
sheltered in Pakistan, the dismantling of terrorist
headquarters and
training facilities, and the removal of all Pakistani
military forces
from Kashmir. Initially, Pakistan offered little
resistance to the
Indian attacks….

India should immediately establish an exchange similar
to PAM, combining
 the desi genius of Dalal Street brokers with cricket
match bettors and
IITian mathematical modelers and geopolitical and
defence pundits, in
order to obtain fresh insights into predicting
terrorist attacks on
India. Establishing such an exchange would not be
expensive. DARPA spent
 only US$600,000 to develop the PAM software and
budgeted US$ 8 million
for operational costs for running the futures exchange
for two years.
The benefits to India of getting Dalal Street to
perform undha badla on
Hafeez Mohammad Sayeed or Mohammed Azhar or Dawood
Ibrahim would greatly
 outweigh such low investments.

By Ravi Visvesvaraya Prasad

The author heads a group on C4ISRT (Command, Control,
Communications &
Computers Intelligence, Surveillance, Reconnaissance,
and Targeting) in
South Asia.

Ravi Visvesvaraya Prasad
Messages: {91} [11] 96 22 17 36 60
rvp@r67.net, rvp@50g.com

Indian Express (http://www.indianexpress.com)
Saturday, 09 August 2003

Ravi Visvesvaraya Prasad

=====

Ravi Visvesvaraya Prasad & Associates
Management Consultants in Information Technology, Internet, Telecom, Software
rvp@r67.net, rvp@50g.com, rp@k.st
http://37.s5.com, http://5s.8m.net, http://28.8m.com, http://q2.8m.net
Faxes: {91} [11] 25 26 68 68, {91} [11] 25 27 63 86
Voice: {91} [11] 96 22 17 36 60

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Received on Fri Aug 8 21:45:08 2003