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In the dark, tense months after 9/11, the Defense Advanced Research Projects Agency came up with a new way to

In the dark, tense months after 9/11, the Defense Advanced Research Projects Agency came up with a new way to anticipate terrorist threats. The idea was too clever by half: a futures market of potential attacks. The underlying scientific theory was that so-called predictive markets are better at guessing outcomes than expert opinions or traditional polling methods—so why not set up a market where people could essentially bet on the likelihood of another attack by time and place? Needless to say, the notion flopped. Various senators decried it as “sick” and “grotesque,” and it was quickly shelved.

A similar backlash is brewing in response to the potential launch of two proposed futures markets based on Hollywood box office results. A group of powerful lobby groups—the Motion Picture Association of America, the Directors Guild and the National Association of Theater Owners, among them—last week warned of the risk of “rampant speculation and financial irresponsibility at a time when the nation is still seeking to recover from an economic meltdown of the financial markets.”

Specifically, the groups asked the Commodity Futures Trading Commission to hold off on giving the new markets the green light while they prepare a response. On Tuesday, according to Variety, several lawmakers, including Dianne Feinstein and Barbara Boxer, came out in support of the delay. But while the industry groups claimed to have been blindsided by news of these new creations, the markets have been openly promoting themselves for at least the past year. One of them, the Cantor Exchange, is run by Wall Street firm Cantor Fitzgerald, which also owns the Hollywood Stock Exchange (HSX), the 14-year-old Web site where people can already “bet” (without real money) on how their favorite stars and movies will perform. And, yes, it can be eerily accurate; its “traders” predicted 9 of the 10 nominees for Best Picture at this year’s Oscars. A second new exchange, set up by a small, Arizona-based company called the Trend Exchange, soberly compares its mission to the way futures exchanges were created in the 19th century to help farmers hedge the risk in crops.

There is, by the way, merit to all of this: A typical major studio movie costs more than $100 million to make and market, and two or three years to come to fruition—which is just one reason why Hollywood’s well-deserved reputation as the epicenter of creativity has as much to do with its accounting as its filmmaking. 

That said, it’s hard to defend derivatives these days, so let’s not even try—except to point out that many billions of dollars of them are still being traded in everything from energy to metals to weather forecasts. It’s also noteworthy that the MPAA, which represents the six major studios, has raised its hackles just after the early departure of its president, Dan Glickman, who one imagines would have taken a less alarmist view of the exchanges: Glickman is a former secretary of agriculture who sits on the board of the Chicago Mercantile Exchange. 

Of course, unlike pork bellies, the weekly box office is a huge part of our cultural psyche. And the mechanics of what is being proposed are kind of comical. For instance, a draft definition of insider trading for the new exchanges does not include people who have, say, seen advance screenings of Wall Street: Money Never Sleeps—every lunkhead has an opinion, after all. Rather, for these purposes, insider information is defined as anyone who knows what the true costs of making and marketing the movie are, whether a release date is going to change and knowing the total number of screens the film is going to be released on.

The MPAA and its allies have blasted the proposed markets as “legalized gambling,” and there is truth to that, too. Rep. Bob Goodlatte, a Virginia Republican on the House Agriculture and Judiciary committees, even warned that the new markets could be manipulated in ways that might “weaken the incentives for artists and inventors to create intellectual property in the first place.” Maybe. On the other hand, Hollywood has long attracted its share of scammers, but that has rarely held it back before. And if the people starting these exchanges are correct, you might actually be able to use them to assist in the arduous task of raising financing for new movies. One way or another, there is always going to be gambling in Casablanca.

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