You know, our intelligence services have generally worked pretty well.

Okay, they didn't predict the end of the Soviet Union. Or 9-11. Or the USS Cole. Or find bin Laden.

It seems to me that blind acceptance of PROVEN systems doesn't always work real well, either.

And last I checked, this wasn't replacing anything, only augmenting them.

It's a shame the Pentagon is so frightened of one market-allergic commentator. I expected better from the largest and most heavily armed power in the world.

Admittedly, I'm recalling years old information here, but I believe there is a difference between "free" markets and "efficient" markets. In the latter, the theory is that stock prices will be accurate according to the information available in the marketplace. I think the reason Santoro both says that this has not yet been proven, as well as insinuating that there may be pretty solid information to the contrary has to do with the tech boom in the late 90's.

Think back to all of the people who were throwing money at dot-coms who weren't making any money, weren't selling a service or a product that would make money, and had no plans to do so. Did the market know that? Yes. Did the knowledge of that information force stock prices accordingly? Not so much.

I'm pretty sure that is what Santoro was referring to with efficient market theory.

To inform readers on what the Efficient Markets Hypothesis (EMH) "is", there are three generally accepted groupings of what the meaning of "is" is for the Efficient Markets Hypothesis. These should be prefaced by a disclaimer:

*IF the market is sufficiently being distorted by externalities and inefficiencies so as to outweigh expected profits*

1) WEAK EMH: Current securities prices reflect everything that was known to the general public already, and they're all trying to beat you to the phone to make a trade. If you're lucky, you might not get a busy signal.

2) SEMI-STRONG EMH: Current securities prices reflect everything that you know and you know no more than anyone else, and everyone else has beaten you to the phone and made their trades already.

3) STRONG EMHF: Current securities prices reflect everything traded by people who probably know a lot more than you know, and they've cashed in already and are busy calling their BMW dealers. You're probably getting a margin call from your broker right now if you are this late making a trade (unless, of course, you traded on early information).

Is EMH provable? Not unless you're omnicient, and even then under the null hypothesis that You are Omniscient and know how securities should be priced, if you were not able to provide statistical results that securities prices consistently differed from those prices determined by You the Omniscient, you might have trouble getting published if you were not able to demonstrate outside of a 95% shadow of a doubt that the market mispriced securities.

Most research I have seen invoking EFH relies on comparing securities prices to securities prices at time t-y to securities prices at time t-y+x, where t represents now and y represents how far the researcher is looking into the past, and x represents the number how far the researcher is looking ahead from t-y, with x

Is that technical enough? Boiled down, it means that a researcher can't pretend to know next week's Wall Street Journal today.

Do the technical difficulties (impossibilities?) in proving EMH (under whatever form specified) make it false? Sure, it's unproven that prices reach a "correct" level.

Has research shown that new information moves prices *IN THE DIRECTION OF* a "correct" level. My understanding is
that, yes, most research shows it does.

Does it mean no information can be gained by a *MOVEMENT* of market prices towards an ideal efficient equilibrium, even if there are roadblocks of externalities and inefficiencies? If you've taken an econometrics course, you should have learned that a change from a trend may tell you more than the trend does.

Was PAM a ridiculous idea? I think it would need too large an investment pool to make it worth much for predicting absolute outcomes. But it might have provided a lot of information regarding directions towards outcomes.

But it sure would have been interesting to be crunching the data it supplied.

Sorry, I should have proofread my disclaimer on the above post better. It should have read,

"If the market is *NOT* sufficienty being distorted by externalities and inefficiencies so as to outweigh expected profits:"

Imagine, our government sponsoring betting on calamities. Repugnant.

Stephen,

Gary Santoro from Mediaburn on the line, here. My comment was not in any way critical of our market economy or capitalism. I'm a capitalist as you may find from my website.

I am however critical of those who believe that financial markets reflect all information at any given time. As I wrote in my post, it was a technical argument against the proposal.

Apart from the imperfect economic theory, the proposal was shameful and unsavory and will apparently be thrown on the scrap heap.

Jeffrey and RWS,

Thanks for the additional info on the EMH.

There's probably a fancy sounding name for it but, one of my disappointments in the cancellation is reluctance of the Pentagon to try the Lots-of-people-all-contributing-a-little-to-the-big-pitcure thing.

A comic I saw a few months back in Wired used this idea to portray a possibility for UN weapons inspections. A few thousand registered users logged on to their computers to control small robot drones in a weapons search. Another example of this is the National Foundation for Cancer Research THINK "screen saver". When your computer is in standby and has a net connection, it runs a program and sends the results back to the lab to be added to the overall volume of knowledge.

The accessibility of information and explosion of computing power in the hands of individuals is going to make all sorts of things possible if government and business are willing to shift power from the experts to the "average" guy.

All it will take are people willing to stand up to pub-seeking reactionary crybabys and have the vision and courage to unleash the unlimited thinking power of a free and wired society.

All markets contain a certain amount of externalities and transaction costs. It could definitely be argued, quite convincingly in my opinion, that the amount of externalities and imperfect information in the terrorism market would render such a market so inefficient as to be useless in predicting the likelihood of future terrorist attacks.

J.I., I doubt that. But I might speculate that the low probability of terrorist/assasination events actually occuring would drive prices to zero. However, gamblers would probably create volatility and the market cap that could make it profitable for the more savy.

For those invovled, I think it would be just a game. The only time that value is actually added is when an event is prevented or threat reduced (the value of market movements helping to direct intelligence is not realized within the market). I think that options would be necessary, such as ones that payout each time an event is prevented; an assasination is placed on the exchange, and a small payout is made after each attempt or exposed conspiracy.

I never knew how many people thought that life insurance and the insurance market in general was "shameful and unsavory."

There are a few facts not yet mentioned in this discussion, the most important of which is that this idea has been tested and is being used.

I have more details on this here.

A couple of general comments not mentioned there...

1) This is from DARPA - these folks are generally pretty smart (they invented the Internet among other things). Smart enough to have anticipated every argument in this thread.

2) Ironically, this is part of the much maligned TIA, which in addition to some programs that horrify civil libertarians has a number of clever ideas. Obviously this idea, whatever you think of it, is not a civil libertarian issue.

3) Whether you believe in EMH or not, or better, again, this idea has been and is being tested. I mention one example in my post (that I have participated in). Other bloggers have come up with others - some successful, some not.

"I never knew how many people thought that life insurance and the insurance market in general was 'shameful and unsavory.' "

Well, generally we only buy life insurance on ourselves and/or family members with the purpose of supporting survivors.

If I tried to take out a policy on the King of Jordan or Michael Jordan, I would probably quickly find myself the subject of an investigation.

What is the probability of this being developed now by a private company and existing as a form of "internet entertainment" and becoming something of a success. There is a whole slew of similar ideas currently being run on the net, from Celebrity stock markets to blogshares. These all operate is a similar way.

Even better is that it would be developed, maintained and controled by a non-governmental institution. No tax money would be spent on it, and nothing would stop the CIA/FBI/NSA from analyzing the data and possibly gain some kind of benefit from it.

derf

The only error the Pentagon made with this proposal was not simply going ahead and implementing it as a black program, so it would have been insulated from the more ignorant and venal of our political poseurs who can't resist an opportunity to do some self-rightous grandstanding at the expense of the American people's security.

One can only hope that the CIA, having a bit more savvy with this sort of thing, already has their own little intelligence goldmine of a delphi pool operating, giving them even more high-value dots to connect at very low cost.

Ok, who is more likely to apply effort: a bunch of greedy individuals eager to make a buck by ferreting out OBJECTIVE information on terrorist activity, versus a bunch of career bureaucrats, some exceptional but buried inside an enormous, sour, cya-mode bureaucracy....now that is a tough call, isn't it?

And that says nothing about the actual terrorists giving clues to their own existence through their own greed to play...

There's no creature dumber, more stupidly prejudiced, with a more impenetrable consciousness, than a United States Senator playing to the ignorant mob. And these guys, especially Democrats, want to keep EXPANDING their arena of influence over the rest of us...

Why doesn't some wealthy philanthropist make a futures market for predicting the smartest and dumbest politicians?

Oh...one final note....there has never been, never will be a perfect, efficient market. Markets just have to be a bit better than the alternative....

To Cliff:
Tell me why "a bunch of greedy individuals eager to make a buck" should ferret out OBJECTIVE information on terrorist activities? Such a market would be a paradise for traders using rumours and conspiracy theories to make a quick buck. There's nothing that would punish them for inventing terrorist threats out of thin air. The market would nervously follow the ups and downs of these rumours and their inventors would usually have some good deals in when the more sober traders counteract.