Predicting Armageddon

Sadly, In light of this, this seems undervalued [emphasis added].

"If Iran continues its nuclear weapons programme, we will attack it," said [Deputy Prime Minister] Shaul Mofaz... "Other options are disappearing. The sanctions are not effective. There will be no alternative but to attack Iran in order to stop the Iranian nuclear programme."

One thing notable about this graphic is how little reaction there has been to this news. To my reading (and I've followed this closely the last several years) it marks a significant step up in rhetoric by the top echelons of the Israeli government. The second thing I find remarkable is how the market has trended steadily upwards over the past four months or so.

This is but one of many 'quarterly' prediction markets Intrade has been running on an airstrike on Iran. All of them, obviously (at least so far) have rewarded the skeptics, however most have trended downward as the market close approached. This one isn't doing that.

I'm of two minds on how much stock to put in this market. (Sorry, pun intended).

On the one hand, military missions are, or at least ought to be, closely guarded secrets. And this would be no ordinary military mission. It is truly existential. Sure a few thousand people might be privvy to some kind of knowledge or direct insight into what was going on, but I doubt any of them would risk being shot in order to make a little extra on the side. So, on that basis, this has many of the characteristics of silly/failed markets in things like papal elections and supreme court nominations.

On the other hand, this is not as surprising as a terrorist attack (a dumb thing in which to make highly specific markets IMHO, even though there are many related indicators that might be useful).

Most nations don't want to go to war. (Iran may be an exception, but we're talking here about an attack on them, not by them). Most nations 'do the (diplomatic) dance'. They do relatively rote, predictable things in the lead-up to any conflict. And those things tend to follow patterns that are not random.

They may not be easily predictable, but there is information out there, held by people not constrained by an oath of secrecy, that is meaningful in discerning whether this will go down or not. Sadly, if I were to bet on it (and I don't -- at least not on real money markets) I would have to say that this market is way undervalued.

UPDATE (July 1, 2008): Almost a month after I first made this post, the trend continues (see below). Despite Israeli moves that make such a strike seem more likely (whether for real or for bluff we can't know), the market hasn't had a very high 'beta' (volatility). This despite (or perhaps because of) significantly higher trading volumes in June. A good summary of recent events around this can be found here.

Overt Airstrike on Iran on or before Dec. 31, 2008