Thursday, February 21, 2008

Quake Markets

Markets offer us a potentially useful tool for predicting earthquakes. Imagine the San Andreas fault divided into segments, each of which carries a price based on the present discounted disvalue of a future quake. That price would reflect both a quake's place in time and its place on the Richter scale. Such a market in quake claims would probably generate some useful--even lifesaving--data. If sufficiently thick, it might offer hedging, too.

I've not yet found that sort of quake market. Has any of you? If none exists, at least one should! Plenty of people and institutions would love to know more about earthquakes. Some of them would gladly support an earthquake market, I'd bet. There remain some legal risks, granted, but I think I've got a good hack for those. (Long story short: independent contractor researchers paid a base salary for making trades and winning bonuses for correct predictions.)

One nice thing about a quake market: Done right, it would generate powerfully positive externalities, benefiting even those who do not trade on the market. Imagine a map of the San Andreas fault, the price of each tradable segment illustrated by color coding or line thickness. One glance at that picture, and you would know whether it was time to relax, double-check your emergency kit, or head for the hills.

[Crossposted to Midas Oracle.]

7 comments:

LP said...

Would seismologists be banned from an earthquake prediction market, since they possess inside information not available to the public market? Although I suppose many seismology research institutions probably make their data public...

Tom W. Bell said...

Gracious, no, lp; those are *exactly* the sort of folks we would *want* on the market.

Anonymous said...

Credentials would need to be authenticated so that fair trading practices could take place, otherwise charlatans would take over the market or possibly comprise most of the market.

Tom W. Bell said...

Anon: I don't think we need to worry about that. If they try to drive the market, charlatans would merely end up subsidizing those who trade on the facts.

Anonymous said...

So the certified seismologists rise to the top and charlatans end up being used in the process, pretty much balancing the whole deal.

Tom W. Bell said...

Anon.: If you think only certified experts know the truth, you need to spend more time in academia!

Anonymous said...

I agree wholeheartedly.