REVENGE OF THE SANDINISTAS

A Good Idea With Bad Press (HAL R. VARIAN, July 31, 2003, NY Times)

The Iowa Electronic Markets, www.biz.uiowa .edu/iem/, has been predicting election results for 12 years using a system very much like the one that the Defense Advanced Research Projects Agency at the Pentagon proposed.

One of the markets the Iowa exchange offered was in vote shares: what fraction of the vote went to the Democratic or Republican candidate. It is particularly easy to assess the outcome of such a market and to compare it with alternative forecasts, like public opinion polls.

As it turns out, these political stock markets provided somewhat better forecasts than polls right before the election--and they provide much better (and less volatile) forecasts several months before the elections. Thus, markets do best exactly where the public opinion polls and expert opinion polls are weakest.

This is not an isolated example. Similar markets have been organized to predict shifts in Federal Reserve monetary policy, the outcome of political conventions and sales of consumer products. The results are that markets typically perform at least as well, and generally better, than feasible alternatives, and they are much cheaper to organize. [...]

There is good reason to believe that a market set up to forecast the sort of political instability that leads to terrorism might work well, too. At least, there is enough reason to warrant an experiment, given the high payoff to having better forecasts of these events.

This is why the Pentagon thought it was important to finance research in this area.

The objections raised by politicians and opinion writers were generally based on misunderstandings of what was actually proposed.

Unfortunately, the objections were just based on misunderstanding of the proposal, but on hatred of the proposer. As confirmation hearings for folks like Otto Reich demonstrated and as the hysterical reaction to appointments of folks like Admiral Poindexter and Elliot Abrams confirms, many on the Left remain unreconciled to the victory of the Reagan administration-backed contras over the Sandinistas in the 1980s. Any chance they get to attack a Poindexter project they will take advantage of, regardless of the underlying value of the idea. Posted by Orrin Judd at July 31, 2003 7:59 AM