THE LIGHTHOUSE, the weekly e-mail newsletter of The Independent Institute, the non-politicized public-policy research organization. "Enlightening Ideas for Public Policy..." http://www.independent.org/tii/lighthouse/Lighthouse.html. Excerpted via :Vol. 5, Issue 31, August 4, 2003 PENTAGON SCRAPS INFORMATION MARKET Even those who understandably scorned the Pentagon's recently cancelled Policy Analysis Market (PAM) -- a.k.a. the terrorism futures market, as some detractors called it -- should admit that it was innovative in a badly needed way. In proposing a virtual market to help predict contingencies in the Middle East and elsewhere, PAM set out to achieve what years of pseudo-reform of U.S. military and intelligence agencies had failed even to attempt -- to bypass the hierarchical bureaucracy that has led to numerous deadly intelligence failures. By making use of the knowledge of thousands of people willing to put their money on the line (maximum bet: $100), PAM was based on the insight that markets, driven by economic actors with powerful incentives to guess correctly, often know better than a handful of professional prognosticators. This point has been well illustrated by the web-based Iowa Political Stock Market, a virtual market that has consistently predicted election outcomes more accurately than pollsters. Because PAM was controversial for more than one reason, it should not be surprising that it was misrepresented by politicians and the media. "Contrary to impressions in the media, the primary purpose of the PAM was not to predict individual events of terrorism but rather to predict inputs into terrorism such as the economic growth rates of countries in the Middle East, political instability, and military activity," write Alexander Tabarrok, research director of the Independent Institute, and Robin Hanson, the principal architect of the Policy Analysis Market, in a new op-ed. Rather, write Tabarrok and Hanson, PAM was to help answer such questions as "What would happen to unrest in the Middle East if the US withdrew its troops in Saudi Arabia" and "How would Jordan fare politically if the 'roadmap' were successfully implemented?" Recent history suggests that traditional approaches to such questions, even if well-informed, can become ignored or politicized. "The yes-man phenomena means that information doesn't rise from the field to the decision-makers," write Tabarrok and Hanson. "And sometimes the bosses don't want to hear what the field has to say. Remember the CIA and FBI analysts who repeatedly tried to signal their worries about terrorism to their superiors but were rebuffed? In contrast, a PAM would produce a public and easily understood number that would be difficult to ignore." Fortunately, the future of such "information markets," "prediction aggregators," or "idea futures" doesn't rest on government funding and would be managed better without it. A few visionary institutions, such as Hewlett-Packard, have already used them to aid in decision-making, and many more will be adopted. But as with so many innovations, don't expect the government to employ them effectively for a long, long time. See "Another Intelligence Failure," by Alexander Tabarrok and Robin Hanson (8/4/03) http://www.independent.org/tii/news/030804Tabarrok.html Also see, "Decision Markets," by Robin Hanson. Chapter 5 in ENTREPRENEURIAL ECONOMICS: Bright Ideas from the Dismal Science, edited by Alexander Tabarrok. Information on ENTREPRENEURIAL ECONOMICS can be found at http://www.EntrepreneurialEconomics.org.