One of the first (organized) examples of the Dumb Agent Theory at work was the Policy Analysis Market (PAM), a market proposed by DARPA and shot down by the United States Congress, which called it the “Terrorist Market”.
In a nutshell, this would have a been a market in which people could trade futures on specific terrorist-related activities, such as a bombing in Lebanon, an attack in the Green Zone, a deposition of some regional leader, etc. etc. The idea was that this market, using the Dumb Agent Theory, would help analysts in garnering the wisdom of crowds in order to determine what is likely to happen. The complaint was that people would profit from terrorist attacks, which was unethical and immoral.
If you would like to know about this market in (much) more detail, we recommend reading Thoughts on the Theory and Practice of Speculative Markets qua Event Predictors by Mason Richey. We should warn that this was obviously written with an academic target market, so nothing is watered down or skipped. On the other hand, it goes into great detail and gives much background to the situation.
For the record, we at Dumbagent did have reservations about this market, although these had nothing to do with the market’s morality. People trade on events on betting websites regardless. In fact, if there is a way to harness this information in order to prevent attacks we are enthusiastically in favor. Our main problem is that the market itself would be self-defeating. If more people were to expect an attack on a certain country in one month’s time, shares in this event would increase in value, but since this would be spotted, more efforts would be made to prevent said attack, in which case the probability of this attack would decrease. This means that the more efficient the market is, the less likely it is to work, or, as Richey puts it: “a market’s supply-demand logic cannot tolerate the act of a securities purchase contributing to that act’s unprofitability.”
Definitely worth a read. Although PAM did not work out, it was a step in the right direction and we hope the idea did not die with it.
Full article here.
