Tuesday, July 29, 2003

The Future of Terrorism is Terrorism Futures-As a finance guy, this is one I can't pass up; Rantburg has this piece on the Defense Department setting up a device to gamble on various terrorist activities happening. There is the possibility of "insider trading" of the bad guys taking going long on a terror contract just before they put out a contract on someone. However, that might be a way to get the information out. If I could apply efficient markets theory to this terror bookmaking, it should point officials towards trouble spots. There are two types of market efficiency that could come into play. The first is what we call semi-strong efficiency, which states that all available public information is factored into the price. If the odds are off, the "smart money" should bet in the other direction, bringing the odds back to a fair price. The second form, dealing with insider trading, is the strong-form efficiency, which claims that all information, public or private, is factored into prices. If I can move over into sports gambling, a large move in a gambling line can indicate either a fixed game or an injury or suspension that hasn't been made public yet; that's one of the reasons the NFL has an elaborate injury disclosure routine. I watched the Harrison Ford version of Sabrina a few days ago; Sabrina's chauffeur dad became a millionaire by listening in on what his industrialist boss was up to on the cell phone and investing accordingly. In this real-life setting, one could see some low-level al Qaeda functionaries getting in some action on the next target. Would we see some a lot of background noise, of Islamic fans betting on the home team? Or some smart terrorist running down the odds on A to throw off the scent on B? Yes, but it might be worth a shot to both get a sense of what the smart money is thinking.

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