Net Exchange proposes a Phase I DARPA SBIR study into the use of combinatorial information markets as decision support tools. The specific application studied will be the estimation of international military instability. The efficiency of U.S. troop deployment can be significantly improved if better estimates of international stability can be made. We will test whether information markets can do this. International stability, as well as many other military and commercial applications, involves the estimation of separate events that are, none the less, complexly inter-related. To provide probability estimates of interrelated events, an information market must be able to handle conditional probabilities. Simple information markets, exemplified by the Iowa Political Stock Exchange, do not and cannot deal with conditional probabilities. A combinatorial market can. In the case of an information market, this functionality is precisely what is needed to handle conditional probabilities among future events. The founders of Net Exchange, while still at Caltech, designed, built, and operated their first combinatorial market in 1992 to assist NASA in R&D resource llocation for its Cassini Saturn mission. The firm was spun out of Caltech in 1994 and has since been a pioneer in the development and commercial use of combinatorial markets. Information markets based on combinatorial processes offer promising solutions for problems and concerns within the DoD and the private sector. Within the DoD, information markets can augment the extensive wargaming activities undertaken by the various services and other DoD functions. In this role, the information market pools the opinions of a broad array of spectators and can be used to compare the actions taken by the wargame participants with the predictions formed from the aggregation of spectator opinions. An information market that can handle conditional probabilities among interrelated and contingent actions provides the level of detail needed in this sort of wargaming application - such functionality is exactly what combinatorial processes bring to an information market. Also within the DoD, but directly affecting actual military operations, is the potential to apply information markets to allocating operational resources. An operational extension of the international military instability application proposed in this proposal could be used to help direct the strategic positioning of resources. More sophisticated and dynamic combinatorial information markets could be used for increasingly fine tactical situations, including, in the extreme, battlefield management functions. Within the private sector, combinatorial information markets offer great potential for improving the management of certain key business processes. The management of a portfolio of internal research and development (R&D) efforts would be a high-valued and rather straightforward application of a combinatorial information market. As the critical information required to make the portfolio decisions is held by the researchers involved with each effort while the portfolio decisions must be made by levels of management above these researchers, an information market is motivated. Many industries have similar R&D structures and many business processes in addition to R&D can benefit from combinatorial information markets.
