Letters to the Editor
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The elephant in the article
The Pentagon's Defense Advanced Research Projects Agency (DARPA) tried to start one of these markets to be predictive of terrorist events. The public got wind, Senators grandstanded, and the project was killed. Looks like it wasn't such a bad idea after all.
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Serious Moral Hazard Problem
I think this market is so dangerous that it must be suppressed. There are people who are so totally unprincipled and totally stupid that they are willing to bet heavily on there being an incident of bird flu in the U.S. by a certain time and then guarantee a payoff by smuggling infected birds into the United States.
Of course if they die of the bird flu they are not going to be able to take the winnings with them. But there are people who will not be deterred by this.
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muddied the waters
"We just have to wait until the Homeland Security Department offers more guidance. Their new security-alert color schemes have muddied the waters too much for us to put together an accurate contract."
Oh, come on. The Homeland Sec color schemes had nothing to do with the risk to the USA of a terrorist attack. It was a measure of W's popularity - if his popularity went down, the alert colors got more frantic. And it worked! Against all odds, amid unprecedented arrogance and incompetence, he got reelected.
Notice how the colors have gone away since the election.
Seeing that it's pretty predictable, sounds to me like not a very good venue for wager.
Say - what were these same people saying about a terrorist attack in early September 2001? Not likely, that's what they were saying. At least they weren't reading their Presidential Briefings.
And what were they saying in late 2002/early 2003? Nukes in 45 minutes. I'm still waiting for the nukes.
Every single one of these predictions has been way way way wrong. Who in their right mind would take any guidance from the administration, except to predict the opposite of what they say?
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Betting on pandemic
There is one extremely valid reason for a market in bird flu futures to exist: life and health insurers will lose massive amounts of money if there is a pandemic. If this market was to get big and viable enough, it could be used to hedge such a risk, and could become an economically efficient way to spread the risk and keep these companies afloat. An insurer that knows it will lose, say, $20billion in the event of a pandemic could buy a contrat that will pay them if there is a pandemic, offsetting some of their losses. This is a good thing.
Furthermore, if they could get an active terrorism market going, there would no longer be a need for TRIA, the taxpayers would be out of the business of insuring for terrorism risk, and the insurance markets would no longer be so worried about terrorism, particularly nuclear, biological, radiological and chemical attacks. This could be a great thing if it works out.
I know it sounds grim, but the reality is that the economy will suffer a serious disruption in the event of a big pandemic or big terror attack, and a futures market in such things could very well help to mitigate - not eliminate - the impact.
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Journalism 101
It's hard to know where to start critiquing this article, but I'll single out just a few sentences:
A recent example occurred on Oct. 21 with Supreme Court nominee Harriet Miers' confirmation contract. At approximately 8:30 that morning, traders monitoring the Harriet Miers confirmation process began aggressively selling contracts betting against her confirmation -- dropping her stock price 42 points in early trading. The following Thursday, Miers withdrew her nomination from the high court.
The extract above relates several facts but NO knowledge. The author uses 'Oct. 21' and then 'the following Thursday'. How long a time period is that? One day or seven? Why should I have to refer to my calendar while reading this article? Surely, the author knows how many days.
Then the author says, "...dropping her stock price 42 points...." It dropped from where? If the price fell from 100 points to 58, I'm unimpressed because the 'market' still thought she'd be confirmed. If the price fell from 42 to zero, I'm awed. Which should I be, unimpressed, awed, or something in between?
Come on editors, there's to your job than checking spelling, grammar, and 'flow'. Here's a hint -- Content, content, content.
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All they're betting on is that someone else will bet on it as well
This is classic autocorrelation. This is a derivative reference mark or index driven solely by the probability that other people agree with whatever the slight changes in direction are at any one moment in time. It's more or less the same mechanics that lead to the 1987 stock market crash and it is as equally flawed as a benchmark for reality or facts.
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Accuracy metrics
I'm disappointed to not see any firm information on the accuracy of predictions in the Intrade market. As a previous poster noted, the market price is derived by a correlative effect based on the number of people who agree that something is/isn't likely to happen. The significant information therefore isn't trade price, or even movement in the trading price, but an overall predictive ratio.
Intrade markets should really be evaluated very similarly to weathermen. If a weatherman (weatherperson, whatever) estimates a 50% chance of rain tomorrow, 50% of the time that should be the result. In the long term, if it only rains 40% of the days the prediction is 50%, then it's more interesting and useful to realize that the weatherman is only 80% accurate.
Clearly the article is more intended to explore the ethical issues of Intrade markets, and I wonder how much of this is relevance vs. how much is laziness. How "dead on" are the markets?
The last trade on AIRSTRIKE.IRAN.JUN06 this morning was at 16.5. After reading this article, I should have a good feel for whether I should rationally buy or short this contract without basing my decision on some kind of vote about how I feel about airstrikes on Iran. If anything, predictive measurements might give journalists a jump on what questions they should be asking at press briefings prior to events unfolding.
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What disturbs me about this . . .
is that people will be actively rooting for the bird flu. It pits some peolple's pocketbooks against other people's health.
It's just so disturbing that people will be actively hoping for others to become ill (and possibly die) so they can make a few bucks.
The semantic distinction (we're just betting on the probability of something happening)is a little too subtle here. The fact is, if you have money on bird flu in March, you're going to be hoping for bird flu in March.
It's unsettling, to say the least.