Why Terrorism Futures Markets Work

A huge win by a gambler on Polymarket shows how this model can accurately predict all kinds of different events — and how intelligence agencies can live or die by it.

If SEBIN (the Venezuelan intelligence agency) had had high-level contact with online prediction market Polymarket, they might have saved Maduro from being captured on January 3. Obviously, they failed to do so. Their bad.

The idea of using futures markets for predicting acts of terrorism (or other secret operations like the capture of Maduro) has been around for a long time. Most notably, DARPA experimented with this in the early 2000s, but with disastrous results. Here is why DARPA’s effort failed, and modern independent platforms like Polymarket succeed — and provide not only unique insights into matters of intelligence, but also many other things — perhaps more on that in a future post.

First, a short background on the recent Polymarket win. Polymarket is an online platform where people can create all kinds of bets, and then other people can bet on them; when some real-world event happens, Polymarket pays out to the winners. In this case, someone created a bet for whether Maduro would be ousted by January 31. Lots of random people bet on it, the vast majority betting No. But then, just before the US raid, someone bet $34,000 on Yes, and as a result, won something over $400,000 in a matter of hours. Although it turns out that this bet violated Polymarket’s terms and all bets were canceled, that hardly matters: What almost certainly happened was that someone with insider knowledge tried to profit on what they knew was about to transpire.

Intelligence agencies have long known this. They reason that in just about every weighty event around the world, some insider will be tempted and place such a bet; a bet that can alert agencies to things about to happen.

In 2001, DARPA said “Hmm, let’s try this for real,” and developed a program called FutureMAP (Futures Markets Applied to Prediction). Working with Net Exchange, they created their own platform called PAM (Policy Analysis Market). The CIA described it like this:¹

PAM would have offered trading on the following kinds of contracts: (1) political, economic, and military indicators for Egypt, Iran, Iraq, Israel, Jordan, Saudi Arabia, Syria, and Turkey; (2) global economic and conflict indicators; and (3) on events as they came up, e.g. the likelihood of Hamas recognizing the state of Israel. It also would have offered contracts called conditional derivatives, which would have allowed traders to speculate on events conditional on the occurrence of other related events (e.g., a trader might bet on the likelihood that the Saudi regime will fall if the United States withdraws from Iraq). PAM’s creators believed that the conditional derivative would have enhanced the “prediction power” of the market.

It only lasted about a year. Congress was up in arms, screaming about the immorality of the government operating a for-profit market for things like mass murder. FutureMAP died a quick death.

Many have argued the concept remains a good one. PAM was known to be a government operation; no terrorist would have been fool enough to place his bet there. But Polymarket (and many, many others) are independent and often overseas. That independence, especially if it can be convincingly demonstrated, makes it a much more attractive place for a terrorist to safely get away with making his quick buck. The concept will only work if they know they will make money, and will get away with it. Intelligence agencies like the CIA should be totally fine with that. It’s better (and cheaper) than sending agents into dangerous cover to make direct cash offers for information.

It’s not necessary (or desirable) to catch the specific person who placed the bet. The valuable information is simply that the bet was placed — that’s how SEBIN could have profited by secreting Maduro away at the last minute. Bettors do need to know their anonymity will be preserved.

And there’s that annoying issue of morality. Polymarket canceled the Maduro bets for just this reason (in part); they can’t be profiting off of events where people are killed or other dangerous and immoral acts are taking place. DARPA argued that restriction should be lifted. If there were truly free prediction markets out there, the intelligence gathered would be invaluable and would end up saving more lives in the future.

In its analysis, the CIA cited Nobel Prize winning economist Friedrich Hayek’s hypothesis of Knowledge and Prices². This stated that all the knowledge need to run a system efficiently was not available in a single place from where it could be easily retrieved, but was instead dispersed among many individuals. Market prices, he said, were the indicator of what all these individuals know in the aggregate.

I don’t know, of course, not being of the spooky persuasion; but my bet would be that not only CIA but most national intelligence agencies have some kind of placement or connection with most of the world’s active online prediction markets. Those who don’t — like SEBIN, apparently — might want to get on that.

1. https://www.cia.gov/resources/csi/static/Prediction-Markets-Enhance-Intel.pdf

2. https://en.wikipedia.org/wiki/The_Use_of_Knowledge_in_Society