Rajiv Sethi writes:
Back in 2003, a Pentagon office led by Admiral John M. Poindexter proposed the creation of “an online futures trading market… in which anonymous speculators would bet on forecasting terrorist attacks, assassinations and coups.” The effort met with immediate bipartisan resistance in Congress, and was scrapped almost as soon as it came to light. Concerns were raised that terrorists could participate in such markets, either to profit directly from impending actions, or to mislead intelligence agencies by betting against events that they were in the process of planning. The idea was described as “morally repugnant and grotesque,” and it cost Poindexter his job.
I discussed this episode at the time, concluding that the eventual emergence of such markets, with or without government involvement, was inevitable. And indeed, here we are . . .
Millions are currently being wagered on whether Iran will face US military action, a coup attempt, or a major cyberattack, and on whether there will be a strike on Israel’s Dimonah nuclear base.
These are markets in which those with inside information (including state actors) can make a lot of money without risk of exposure, since the exchange is crypto-based and doesn’t have a know-your-client requirement. The insiders don’t have to be primary decision makers, they just need to have access to closely-held information. . . .
As it happens, there is some fairly strong evidence that insiders have been trading ahead of military strikes, on at least three occasions. The most recent case involves an account that was created and funded about one day before the Israel’s June 13 attack on Iran, started accumulating contracts at scale about twelve hours before the bombing was initiated, made $134,000 in profits, then cashed out immediately and disappeared from the exchange. . . .
There is a more serious problem to consider . . . an organization or state actor could accumulate a large position before executing a plan of attack, or simply engage in chatter that moves markets and allows it to cash out at a profit. . . .
Rajiv writes that, “there is nothing that can be done in the foreseeable future to prevent the proliferation of crypto-based prediction markets on any event imaginable.”
Is that really true? I’m not sure. Couldn’t state or national governments pass a law making such contracts unenforceable? I’m not sure exactly how this would be done, but lots of things online are illegal. There could just be a law making it illegal to bet on any of some class of events including wars, crimes, etc. Such betting could still occur illegally but I imagine there’d be a lot less of it than if it were legal.
In any case, I wanted to share my immediate reaction when reading Rajiv’s post, which is that I wrote about that Poindexter thing when it came out, many years ago. One thing people didn’t always note is that Poindexter himself was a convicted terrorist! (See here for more on this point.)
Whatever the virtues of terrorism markets, I feel like we could all agree that actual terrorists should not be running them.
P.S. Also, remember to be careful about conditional predictions estimated by combining odds from different bets.
Would that rule out betting on a streaker at the Super Bowl?
I have never watched the Super Bowl and I have never been a streaker, but that was a great comment regarding how to take advantage of the rules.
Tangentially related:
https://www.nytimes.com/2026/02/11/business/economy/forecasts-prediction-markets-economy.html
In which it’s described how people who have an “edge” are those who are most likely to participate in the prediction markets. Seems obvious in hindsight, but I don’t think I’ve ever explicitly connected that to why the predictions markets are better than I generally expect them to be. A kind of survivor bias. Also discussed is a form of the “herding” issue which I think has been discussed here (or was it at Nate Silver’s stuff) with respect to election polling.
Some readers may know the book called ‘What Money Can’t Buy: The Moral Limits of Markets’ by Michael Sandel. While I do not agree with everything he writes — he does cite some junk science — he makes two important points about the limits of markets:
(1) Fairness and inequality (trading goods on markets makes them practically unattainable for poor people), and
(2) Corruption.
The possibility of corruption in betting markets for terrorism is actually the subject of one of the book’s chapters. However, this issue extends far beyond the narrow scope of betting markets. There are many things that we might not want to open up to trade (or betting) because of the potential for corruption.
“Couldn’t state or national governments pass a law making such contracts unenforceable?”
I think there are things called “smart contracts” that can be coded up to automatically execute on the blockchain upon certain triggers without having to rely on courts to enforce the contracts. So Sethi is probably correct that these things while grotesque are inevitable.
Yes, cryptocurrencies were invented by cypherpunks who didn’t trust existing governments. While they’ve moved closer to the mainstream since then, the idea was to have a space immunized from such governments. It is still thought to be a weak point that people generally want to convert their crypto assets into some other asset which exists in the non-digital world, and governments can insert themselves there.
“Whatever the virtues of terrorism markets, I feel like we could all agree that actual terrorists should not be running them.”
I don’t know, there’s something to be said for having direct experience in the subject of the market.
Kind of like the way systems crackers sometimes age into becoming network security consultants.
Quite a few real terrorists have eventually ended up as the head of their country!
(of course they get called “freedom fighters”, but that’s because their side won).
Treason doth never prosper: what ’s the reason?
Why, if it prosper, none dare call it treason.
John Harington (1560–1612)
+1
Seth:
OK, let me say that we could all agree that unrepentant terrorists should not be running prediction markets. Terrorist Poindexter indeed was not head of the country, but he was a high-ranking government official.