Terror Betting Markets and the 9/11 Commission

Remember "terrorism betting markets"? The program was killed one day after it made headlines - so much for democratic inertia! Opponents plausibly argued that these markets made terrorism pay. According to a press release by Senators Wyden and Dorgan:

Terrorists themselves could drive up the market for an event they are planning and profit from an attack, or even make false bets to mislead intelligence authorities.

Of course, you hardly need terrorism betting markets to make money from terrorism; all you need to do is short the stocks of firms that will be adversely affected (say... airlines?). So if betting on terrorism scares you, you should still be scared! But before you start losing sleep, check out the findings of the 9/11 Commission. They find no evidence of 9/11-related stock market manipulation. Here are the two key passages:

There also have been claims that al Qaeda financed itself through manipulation of the stock market based on its advance knowledge of the 9/11 attacks. Exhaustive investigations by the Securities and Exchange Commission, FBI, and other agencies have uncovered no evidence that anyone with advance knowledge of the attacks profited through securities transactions. (pp.171-2)

Highly publicized allegations of insider trading in advance of 9/11 generally rest on reports of unusual pre-9/11 trading activity in companies whose stock plummeted after the attacks. Some unusual trading did in fact occur, but each such trade proved to have an innocuous explanation. For example, the volume of put options— investments that pay off only when a stock drops in price—surged in the parent companies of United Airlines on September 6 and American Airlines on September 10—highly suspicious trading on its face. Yet, further investigation has revealed that the trading had no connection with 9/11. A single U.S.-based institutional investor with no conceivable ties to al Qaeda purchased 95 percent of the UAL puts on September 6 as part of a trading strategy that also included buying 115,000 shares of American on September 10... The SEC and the FBI, aided by other agencies and the securities industry, devoted enormous resources to investigating this issue, including securing the cooperation of many foreign governments. These investigators have found that the apparently suspicious consistently proved innocuous. (p.499)

It is worth pointing out that even if the 9/11 Commission had found evidence of a terror/stock market connection, there would still be almost no case against the original plan for terrorism betting markets. The maximum bet was under $100. I like the economic theory of suicide as much as the next economist, but I still can't imagine any would-be terrorist changing his mind over a Benjamin.

Thanks to my colleague and terrorism betting market lightning rod Robin Hanson for the 9/11 pointer. See also Alex's short piece In Defense of Prediction Markets, kindly made available by Mahalanobis.