IEM Cited As Model That Works
July 31, 2003 | New York TimesThe so-called terrorism futures market sounded like a hoax: investors would have been able to make money from attacks and strife. Now that the red-faced Pentagon has closed down the project, it's appropriate to ask, "What were they thinking?" The Department of Defense argued that markets "are extremely efficient, effective and timely aggregators of dispersed and even hidden information...often better than expert opinions." That's true. The UNIVERSITY OF IOWA has a neat system allowing bettors to establish the odds for candidates in races in America and overseas. The Iowa markets have generally done a better job than pollsters at predicting the outcomes of elections. Markets also do a great job at more traditional tasks, like matching buyers and sellers and setting prices for everything from chickens to semiconductor chips. Still, the Pentagon's concept is flawed. Markets are not very good at setting prices for rare events. Those who trade in the Iowa political exchange have the benefit of historical election results and daily polls; property insurance companies know full well when the Florida hurricane season starts. But could markets have given us a price for the odds of a shooting in the balcony of City Hall in New York? Sure, markets learn from experience. It's been a long time, though, since Aaron Burr shot Alexander Hamilton -- and that was across the river in New Jersey.
Contact: Forrest Nelson