Inside Story
Virtual, Viable, Valuable
Peter Horner, editor
horner@lionhrtpub.com
Virtual "futures markets" may not be virtuous judging from the recent public and political outcry over the Pentagon's proposal to create a "market" for terrorism scenarios, but are they viable and valuable, particularly to those in the business of predicting business and political events?
In late July, virtual stock markets were thrust into the international spotlight when the media got wind of the Pentagon's plans to establish a virtual market designed to take "bets" on the possibility of political assassinations, coup d'états and terrorist attacks in various countries around the world. The Pentagon saw it as an innovative means to gather and assess information to aid in the war on terrorism, information that couldn't be found anywhere else, information that had largely eluded the U.S. intelligence community.
Many politicians and their constituents saw it as an affront to all things decent. Betting on future assassinations? How distasteful can you get? Within days, heads rolled and the Pentagon announced it was pulling the plug on the whole idea.
Did the Pentagon do the right thing?
Not according to Sam Savage, a consulting professor of management science at Stanford University and a frequent contributor to this publication (see "Weapons of Mass Instruction" in the August 2003 issue of OR/MS Today) or colleague Michael Schrage of MIT. On Aug. 3, the Washington Post published an op-ed piece by Savage and Schrage in which the authors advised Defense Secretary Donald Rumsfeld not to turn his back on "Nobel Prize-winning research" is the area of economics and market psychology.
"The idea that it's okay to pay $30 million to folks who tell us where Uday and Qusay were hiding but morally repugnant to invest $1 million to set up viable market mechanisms to help us track al Qaeda operatives is simply ludicrous," Savage and Schrage note.
The title of their op-ed piece: "If this is Harebrained, Bet on the Hare."
"Remember how we found out that in the days before 9/11, an unusual volume of bets were made against United and American Airlines in the options market?," Savage and Schrage write. "Too bad our analysts weren't paying attention. But now we have opened their eyes to something that decision theorists have known for decades: The probability of events can be measured in terms of the bets people are willing to make. ... Predictive futures markets may ultimately prove more dependable, most cost-effective and more useful for net assessment than much of the intelligence produce we get today ..."
No one has to tell that to Martin Spann and Bernd Skiera, the authors of this month's cover story on virtual stock markets. Spann and Skiera's research, which will appear in far greater detail in an upcoming issue of Management Science, concludes that, when done properly, VSMs are viable, valuable and virtuous, whether it's a business or a politician's life that's on the line.
OR/MS Today copyright © 2003 by the Institute for Operations Research and the Management Sciences. All rights reserved.
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