The Independent Institute's take on PAM

[Freematt357 at aol.com]

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.