Futures ShockWhat happens when the government tries to use the futures market to predict terrorism?by Seth Grimes Continued from Page 1 Do Try This at HomeSince retrospective analysis of 2001 United and American options trades foreshadowed the impending attacks, you might ask what value a futures market dedicated to terrorism indicators would offer. A first answer is that a dedicated futures market would aggregate diverse data and indicators in a single interface. PAM would serve the role of an analytic portal with a look and feel that would be similar to the dashboard displays that have now become common in the BI world. Second, PAM would provide a form of collaborative analytics, collecting and weighing input from diverse expert players. But rather than relying on a deterministic, fixed model, PAM would facilitate dynamic electronic market-based decision support. PAM concepts owe much to Delphi Methods, which were similarly developed to synthesize diverse expert opinions in a quantitative manner that would avoid individual bias. To cite a less esoteric comparison, PAM isn't so dissimilar from a market researcher's focus group. PAM's data collection would have been no more novel than its techniques. According to the PAM Web site, "The Economist Intelligence Unit [(EIU)] ... continuously assesses and forecasts political, economic, and business conditions in 195 countries" via "a global network of over 500 analysts." EIU "is working ... to collect and process the data on which the securities in PAM are based, and then to assess the value of the securities when they mature." While I can't know if EIU provided unique services to PAM, I will observe that private customers can obtain similar data and analyses from sources ranging from the World Bank to vendors such as EcoWin. You can also buy extensive data from DoubleClick — Web statistics in this case. DoubleClick's 1999 proposal to merge supposedly anonymous Web-tracking data with direct-marketing information collected offline set off a scandal. So not even public outrage over data-use policies is new with PAM. What about PAM's goal of quantifying the importance of indicators that could forecast terrorism and the likelihood of terrorist events? Especially in the wake of the Sept. 11 attacks, every organization knows that it should attempt to quantify and mitigate risk by hedging against disruptive events and preparing disaster-recovery plans. Insuring the lives of key executives isn't considered ghoulish or a veiled death threat — it's standard business practice. And every significant organization concerns itself with external trends. Witness the popularity of analyst reports that prognosticate about emerging technologies and markets and even assign probabilities to possible outcomes. Coming Up ShortAlthough PAM was using common techniques, it lacked explanatory power. For example, a high contract value for a weakening of Saudi religious fundamentalism suggests a likely outcome without illuminating the events that would precede and lead to the end result, that is, without regard for the bidders' reasoning. PAM-based predictions would be opaque, contributing little to the goal of preventing terrorism and lending nothing to the construction of predictive models. Last, it appears that PAM, like most of today's business systems, would have been unable to accommodate unexpected events, which wouldn't have been listed on the market or had the precedents necessary for pricing. There's a simple conclusion to be drawn from PAM's short life and rapid demise: It's important to identify and assess risk, exploiting the wealth of available data and modern, Web-based technologies that can facilitate aggregation, analysis, and visualization. But for goodness sake, keep your head down. RESOURCES"Terrorists Trailed at CBOE," Chicago Sun-Times, Sept. 20 2001 Defense Advanced Research Projects Agency (DARPA): www.darpa.mil Economist Intelligence Unit: www.eiu.com EcoWin: www.ecowin.com The HERO e-Delphi system: www.hero.geog.psu.edu/products/Delphi_white_paper.pdf World Bank Data and Statistics: www.worldbank.org/data
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