Question

Case 2: The Market for Terrorism

“It is vitally important for the United States to anticipate and possibly offset future terrorist attacks. Similarly, it is necessary to know whether certain government leaders might be overthrown or what developments in other parts of the world might occur such as Russia invading Georgia or Poland. How can such information be obtained? Could markets be used? A few people thought the best method would be to create a market whereby people could speculate on certain events and could profit from correct predictions. The Defense Advanced Research Projects Agency (DARPA), a research think tank within the Department of Defense, decided to create a market through which traders could buy and sell contracts that specified various events. For example, contracts could be based on questions such as ‘How fast will the non-oil output of Egypt grow next year?’ or ‘Will the U.S. military withdraw from country A in two years or less?’ The concept was to discover whether trading in such contracts could help to predict future events and how connections between events were perceived.

Critics tore into DARPA for creating a way to bet on terrorism. It was argued that a terrorist could bet on some act of terrorism and then carry it out, thereby profiting on tragedy. Once people started to hear about the DARPA project, funding was cut and all research related to it was terminated.

1. What information can markets provide that spies, informants and others might not?
2. How could a market provide information about terrorism?”

Answer 1

ANSWER:

1.What information can markets provide that spies, informants and others might not?

Case summary:

It is very crucial for Country U to offset the future terrorist attacks. Some analysts thought of a method to create a market. Then the people will be able to speculate and make profit from predictions.

The defense related agency has taken initiation to create a market. An argument was arisen about the terrorist can bet on some terrorism acts and can carry out, as a result, profiting on tragedy. Then the investors did not come forward to make investment in that defense related agency.

Determine the information provided by markets:
A market has the ability to reflect the macro economic factors. A country’s economic position can be traced from the performance of market not directly one can read the financial position of a country form its market condition.

If the market is very active, then it indicates the better condition of a country. Likely, worst condition can be traced from the Worst performance of the market. A market can perform according to the flow of publicly available information.

Conclusion:

The economic condition of a country can be traced from the prevailing market condition. Hence, a country will always try to improve the market performance.

2.How could a market provide information about terrorism?

Case summary:

It is very crucial for Country U to offset the future terrorist attacks. Some analysts thought of a method to create a market. Then the people will be able to speculate and make profit from predictions.

The defense related agency has taken initiation to create a market. An argument was arisen about the terrorist can bet on some terrorism acts and can carry out, as a result profiting on tragedy. Then the investors did not come forward to make investment in that defense related agency.

Determine whether a market provides information regarding terrorism:

An efficient market has the ability to reflect all publicly available information and thereby the investors can make profit out of information. Insider trading is not legally permitted.

Hence, the investors will act according to the public information. Terrorist attack is a macroeconomic condition. It will affect the performance of the market. This is because, terrorism will have a direct impact on economic condition and the economic condition affects the market

Conclusion:

Terrorism is a macroeconomic condition. The macroeconomic condition will have an impact on the market. Hence, the market can reflect the information regarding terrorism.