DSS News 
                  D. J. Power, Editor 
             August 3, 2003 -- Vol. 4, No. 16 
       A Bi-Weekly Publication of DSSResources.COM 


    Check the article by Chris Lang "Professional and 
   Collaborative Decision-Support" at DSSResources.COM



* Ask Dan -- Are decision markets a useful decision support tool?
* DSS News Releases 


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Ask Dan!
by Dan Power

Are decision markets a useful decision support tool?

YES, decision markets are useful for appropriate prediction tasks. Some 
Ask Dan! columns are more time sensitive than others. This topic is 
"hot".  On Thursday, July 31, 2003 I received an email from Chris Lang 
with the subject heading "Please Help!" I also received an email from 
Tippie News, Henry B. Tippie College of Business, University of Iowa.  
Both emails dealt with the controversy in this week's news about what 
have been called information aggregating markets, electronic markets, 
policy analysis markets, and decision markets. 

Chris wrote "You've seen the headlines, 'Pentagon Prepares a Futures 
Market on Terror Attacks' and 'Pentagon Kills Terror Futures Market', 
and hopefully you were amazed that world-class economists could propose 
anything sounding so idiotic. Hopefully you were so amazed that you got 
suspicious that perhaps the whole story was not being told. That would 
have been a good instinct." I agree with you Chris.  The headlines are 
sensational and certainly don't tell the entire story about the 
appropriate use of this decision support tool.

On Thursday, July 31, the Washington Post published an editorial titled 
"The Furor Over 'Terrorism Futures'" by Justin Wolfers and Eric 
Zitzewitz, assistant professors of economics at Stanford Graduate School 
of Business.  Wolfers and Zitzewitz wrote "The idea was simple: By 
creating a market in which people can buy and sell contracts that pay 
$100 if certain political events occur in the Middle East, we can infer 
from the price of such securities the probability of these outcomes. By 
explicitly pricing such risks, we can better understand them and better 
respond to them."

The University of Iowa's Tippie College of Business, where the Iowa 
Electronic Markets (IEM) was developed, has been a leader in Web-based 
futures trading. "The IEM provides the framework for trading experiments 
on topics ranging from political contests to Hollywood Box Office 
receipts. The IEM actually has had better election forecasting results 
than many political pollsters."  The web has made artificial markets 
possible. I've heard Joyce Berg, a professor in The University of Iowa's 
Tippie College of Business, make a public presentation about the Iowa 
Electronic Markets and there are always sceptics about how it can 
produce such outstanding results. Let's see what was proposed and what 
works with decision markets.

The Wall Street Journal (July 29, 2003) reported "Sen. Byron Dorgan (D., 
N.D.) is seeking, along with colleagues, to thwart a Pentagon effort to 
secure $8 million to expand the project; the Pentagon already has spent 
about $750,000 to cover start-up costs. The effort is loosely based on 
the Iowa Electronic Markets, a futures exchange run by The University of 
Iowa Tippie College of Business, that anticipates U.S. election results 
and Federal Reserve decisions." 

The San Francisco Chronicle (July 30, 2003) reported "Facing a hailstorm 
of criticism from Democrats and Republicans, the Bush administration 
abruptly pulled the plug Tuesday on a proposed Pentagon research project 
to allow investors to make bets on the probabilities of terrorist 
attacks, assassinations and coups in the Middle East. The program -- 
called the Policy Analysis Market - was the brainchild of the Pentagon's 
Defense Advanced Research Projects Agency, or DARPA. Supporters of the 
proposal, including a number of prominent economists, argue that 
'decision markets' such as the one proposed by the Pentagon can be very 
useful in using the collective knowledge of investors -- as expressed in 
their betting on prices -- to predict outcomes."

An article in the New Scientist (July 30, 2003) states "In an 
extraordinary day in Washington on Tuesday, a government-backed futures 
market aimed at predicting terrorist attacks and other events was both 
revealed and then cancelled. Using futures markets to predict future 
events is not new. US presidential elections have been analyzed by the 
Iowa Electronic Markets (IEM) since 1986. It claims to be twice as 
accurate as pundits. Thomas Rietz, a director of the IEM, is doubtful 
speculators would really have provided helpful intelligence. When 
betting on presidential elections, he says, people can use their network 
of friends, family and workmates to form an opinion - that would not be 
the case for terrorist activity."

I agree with Tom Rietz.  Issues on terror attacks probably can not be 
predicted accurately using decision markets.  If we want to tap into the 
"collective wisdom" through a futures market, we need to have the 
web-based decision market accessed by knowledgeable users and we need to 
ask appropriate questions that people will be motivated to "bet on". We 
definitely need to conduct more research on the use of decision markets 
as decision support tools. Private companies have used decision markets 
to develop demand forecasts and we may be able to structure an 
electronic decision market to predict collective behaviors related to 
policy issues. I don't like to see science politicized, but the proposed 
DARPA project was poorly conceived and outrageously expensive.  The 
proposal reviewers at DARPA made a mistake. The Iowa Electronic Markets 
have received much less funding and done ground breaking research in 
this area.  Perhaps DARPA can move the $8 million to other decision 
market and DSS research projects that are not so controversial. This 
type of research needs to continue.

If you have any comments, questions, or feedback on this article, please 
feel free to email me at .


Iowa Electronic Markets,

Tippie News (Special IEM Edition), Wednesday, 30 July 2003, contact

Wolfers, J. and E. Zitzewitz, "The Furor Over 'Terrorism Futures'," 
Washington Post, Thursday, July 31, 2003, page A19,

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DSS News Releases - July 21 to July 30, 2003

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