BOB GARFIELD: A web site called Long Bets features a prediction and a betting opportunity that by the year 2020 a single event of bio-terror or bio-error will cause one million casualties or more. When web sites entertain wagers on death and mayhem, it's deemed a quirk of the Internet Age. When the Pentagon sponsors such wagering, it's a scandal, a scandal that on Thursday caused Bush appointee John Poindexter his job and resulted in the sudden end of his pilot program called The Policy Analysis Market. Had the Pentagon plan moved forward, traders would have been invited to invest in futures contracts on political events in the Middle East, the idea being that the accumulation of information among everybody with a financial interest is more revealing than even the best experts' analysis. Dan Gross writes the Money Box column for Slate.com and explains what's behind the old economic axiom "The tickertape knows."
DAN GROSS: If you believe that markets are efficient and express intelligence and information in terms of a price of a commodity or a stock or a bond, if you believe all that, which most market theorists do, then you believe that available information tends to get processed into the price of commodities by the activity of traders -- whether you're talking about the price of the ten year bond or in this case, the possibility of Lebanon's government falling in June 2005.
BOB GARFIELD:Because in the aggregate, all of the information that goes into the buying and selling of futures securities about events in the Middle East, reflect more knowledge than the State Department has on its best day. That's the principle, right?
DAN GROSS: Exactly, and I think the hope of this was that the exchange that they talked about would attract people who might not participate in National Security Council briefings but people who have ideas, contacts, inside information -- all the sorts of data that get incorporated into, say, the price of a stock.
BOB GARFIELD:All right, putting aside for just a moment the perversity [LAUGHS] of the federal government running a betting parlor on terrorism, there are a number of holes in the efficient market theory. If it's true that the market represents the actual value of any given security based on all that is known about it, how would you explain the internet bubble, for example, which seemed to have gotten it all wrong for about five years?
DAN GROSS: The tape may know, but what the tape knows frequently doesn't bear any relationship to reality. You can go back through history --it happened in the 1920s and various oil and real estate booms and busts where markets that are theoretically open, are rational and efficient, get completely out of whack and then come crashing down to earth.
BOB GARFIELD:The idea behind the policy analysis market isn't exactly novel. There are other so-called "exotic markets." Tell me about the Iowa Electronics Market.
DAN GROSS: That's been around for several years. It's run out of the University of Iowa business school. Essentially, people could buy and sell futures contracts based on presidential candidates, and the price movement in that actually very closely mirrored the polling action in the 2000 election, and it has since expanded to cover other types of elections as well. And there it, it does seem to have some pretty good predictive capability, although I don't think it quite predicted the 2000 stalemate.
BOB GARFIELD:When we talk about the model of the so-called "efficient market," which is driven by many, many, many investors motivated by many, many, many different things, what role do the media have?
DAN GROSS: It's an interesting question because on the one hand, you might simply view the media as just one of many kind of conduits for information. Right? Someone who is a trader, who is making bets, is getting their information from their buddies who sit next to them, the people they talk to on the train, the Wall Street Journal, CNBC, and it all sort of goes into the mix and gets entered as an input and the output you get is some price that is supposed to reflect the collective judgment of the market. That's maybe what an economist would say. Of course the people who produce the media like to think of their role as something quite different -- that they are something more than a kind of passive participant in this gigantic process. You're supposed to get a leg up on the market by reading Fortune or by tuning in to CNBC.
BOB GARFIELD:Imagining a policy analysis market, what do you suppose the potential would be for the media to be exploited and abused by various actors in the Middle East or elsewhere and for the media to commit abuses themselves in order to give its audience some sort of perceived edge?
DAN GROSS: It would be very similar to what you saw in the media in the '90s where people would go on television and talk glowingly about a certain stock that they had a particular interest in or leak a story that was negative about a stock that they were short, so that the Wall Street Journal might run an article and people would act on that behavior. Right now, people who try to influence policy, they'll leak a story to the Washington Post or they'll call up a reporter for the New York Times. You already see that going on without a real marketplace for the commodity of policy.
BOB GARFIELD:So it's hard enough for reporters to divine the motives of their sources as it stands now. You throw money into the equation and who stands to literally profit and it -- well it would be confusing, would it not?
DAN GROSS: Correct. In New York, if you're covering the markets, you always looked to how the potential profits in their business or in their trading positions might affect what they're telling you, and you go from there. In Washington, I think it's a different set of sensibilities; you are trying to determine whether they're telling you this because they want to sabotage a rival, because they are promoting, you know, one faction over another. And I think it's a different kind of set of tools that enables the reporters in the different realms to sift through the information.
BOB GARFIELD: Dan Gross writes the Money Box column for Slate.com. Dan, thank you very much!
DAN GROSS: Thank you, Bob.
BROOKE GLADSTONE: Coming up, as Burlington blogs, so blogs the nation.