How to profit from horrible events

Watchword

One of the consolations of latter-day capitalism has been the new opportunities that it has thrown up for trading.

Even death is a money-making opportunity: visit the Ghoul Pool on the Internet, which allows you to bet on the death of celebrities. When comedian Bob Hope died recently, or when Saddam's sons were killed, this is what the Ghoul Pool had to say: "FINALLY, the day we never thought would come... Bob Hope, dead at age 100. Score one for Mr. 50s! Both Uday and Qusay Hussein, sons of Sodom, are confirmed killed.

Huzzah! Hits for Rigor Mortis Mairi and The Mighty Skippy." Messes Mr 50s, Rigor Mortis Mairi and The Mighty Skippy, obviously, are gentlemen who hit the jackpot on those deaths. There's even a megadeath game, or the Indo-Pak death pool, where all you have to do to win is to predict when the first nuclear bomb will be dropped. Don't forget to predict how many millions will be killed, because that's how a tie-breaker will be decided.

Lots of markets allowed bets on the last Gulf War, with one site, Tradesports.com, predicting that Saddam would be removed from power by the end of April. Currently, Tradesports allows you to trade on whether Sharon will outlast Arafat, or whether the US will catch Osama bin Laden.

The current price of the 'Osama being caught in 2003' contract is 19, indicating that the market believes that the probability of the man being caught this year is only 19 per cent. The Iowa Electronic Market, run by the University of Iowa, is offering markets in the 2004 US presidential elections, in computer industry returns and in the US Fed's rate cut announcements. (The probability of the Fed leaving interest rates unchanged at its September meeting is currently 87 per cent).

Nor are these markets limited to sports events or politics or current affairs. For instance, if you're the scientific type, you can test your mettle at the Foresight Exchange, which allows you to place your bets on 'Human clone before 2005' (current probability 25 per cent), or 'Human organ farms by 2025' (current odds 24 per cent).

So the Pentagon's Policy Analysis Market was merely setting the seal of official approval on markets that the private sector had already developed.

As they pointed out, "Futures markets have proven themselves to be good at predicting such things as election results; they are often better than expert opinions." The trouble is that the thought of people making US government sanctioned bets on the 'Overthrow of the Jordanian monarchy' or 'Assassination of Arafat' was a diplomatic disaster, which is why it created a stink.

It can be argued, of course, that if punters can bet on the horrible chance of 'Bush being re-elected in 2004' there's no reason why they can't bet on terrorist strikes, but some people may not see it quite that way. There are other problems: what if you find out that terrorists are going to bomb Srinagar, don't tell the police, and collect the money on a 'Terrorists strike Srinagar in August' contract?

What if you decide to plant the bomb yourself, or ask the terrorists to do so, and split the winnings? What if terrorists want to attack Mumbai, so they buy 'Bomb in Delhi' contracts and push up its price. While the police secure Delhi, they bomb Mumbai. And if markets are all that efficient, how come we have spectacular booms and busts? As the US government website (now removed) pointed out, the programme faced "a number of major technical challenges and uncertainties.

Can the market survive and will people continue to participate when US authorities use it to prevent terrorist attacks? Can futures markets be manipulated by adversaries?"

But consider the positives: The Iowa Electronic Market has outperformed pollsters; the Hollywood Exchange has accurately forecast box-office sales, California orange juice futures do better than the weather pundits, and a Hewlett-Packard internal market has been used to forecast the company's monthly sales.

Surely a market in terror futures is worth a try? But instead of the US government managing the market, all that the Pentagon needs to do is discreetly encourage a private Terror Exchange, so that all the moral outrage can be deflected to 'crass commercialism' or 'greedy speculators.'

Ditto for India, where it is entirely possible that mercenary terrorists, lured by the money, may actually bet in these markets, enabling them to become an accurate predictive tool. Who knows, the US government might even be able to nail Osama on insider trading.

manas@business-standard.com