Here's the opinion of Tyler Cowen, Ph.D. in econ, on The Volokh Conspiracy (www.volokh.com):
[Tyler Cowen, 1:35 PM]
Could betting on terrorism really work? Today the Senate stopped DARPA from setting up a market for betting on whether terrorists will strike.
If we had such a market, would it work?
Think of it as a substitute for government intelligence. If you want to know who will win the Super Bowl, check the Las Vegas odds (you wouldn't ask the CIA, even if it were assigned to that task). Why should the best device for aggregating information be any different for terrorism or for that matter anything else?
Here are some criticisms from some prominent Senators.
Which criticisms make sense?
- Would terrorists bet on attacks and then carry them out?
Maybe, but they can already do this with current stock markets, if they are at all clever.
- Are we allowing some people to profit from the death of others?
Yes, but how does this differ from life insurance?
- Would price/betting odds accurately reflect information?
Probably, provided you had a fair number of bettors. Return to the Super Bowl analogy. And the stock market figured out within minutes which contracting firm was responsible for the Challenger crash.
What is the problem then? I see panic as the biggest problem. Say the betting markets told us an attack was very likely very soon. The panic costs might outweigh the chance that we could now react and stop the attack.
Another problem is that the government might use market identities to ferret out possible terrorists (imagine the knock on your door after you win millions), which would bias the betting and thus the odds and resulting prices.
And as one critic points out (see the first link in this post), it could damage our diplomacy, would other countries like that we bet on whether they attack us (just think how sensitive the Saudis are), or what if we bet on when the Saudi monarchy will fall? This could create an information cascade, and hasten events that might better be left postponed.
Jim Bell once proposed the idea of "Assassination Politics," I am told he was thrown in jail for it.