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Study Finds Heavy Cost of War Anticipation


Anticipation of the war in Iraq has cost the stock market almost $1.1 trillion since September 2002, according to a study released by Harvard and Stanford researchers based on people’s bets on when Saddam Hussein will be deposed.

“By mid-march, about 95 percent of the war’s effect on the U.S. stock market has already been priced in and $1.1 trillion of the nation’s wealth has disappeared,” Justin Wolfers, the study’s co-author and an assistant professor at Stanford’s Graduate School of Business said in a press release.

Wolfers, Eric Zitzewitz ’93, an assistant professor at Stanford’s Graduate School of Business, and Andrew Leigh, a doctoral student at the Kennedy School of Government, conducted the study, which compared stock market fluctuations to the price of the “Saddam Securities.”

Researchers used the securities—online wagers on the likelihood that Saddam will be deposed by a certain date—as an indicator of people’s perception of the possibility of war. They correlated an increase in these bets values with market losses.

The Saddam Securities are issued by Tradesports, a website that enables the trading of wagers on the outcome of sporting matches, political competitions and other events.

The market is now 15 percent lower than it would have been had the United States not gone to war, the study found.

Expectations that short run oil prices would rise, investor and consumer confidence would fall and concerns about another terrorist attack lead to the market’s decline, said Zitzewitz.

Leigh said that some people may have been skeptical about the study at first due to its use of the unconventional securities.

“I think it takes people a little while to realize that it’s a serious study because we use an unusual instrument to determine the cost of war,” he said.

Leigh argues, however, that Saddam Securities are an accurate measure— because people “put their money where their mouth is.”

Zitzewitz said that a Lehman Brothers analysis of the market effects of the war has yielded similar results.

“I think that people are broadly agreeing with what we’ve done,” Zitzewitz said.

Zitzewitz said that he and his co-authors were motivated to do the study because their wanted to “say something relevant to the debate about the war.”

Although the study focused on the threat of war’s effect on the market, Zitzewitz also described potential long term outcomes, postulating that there is a 30 percent chance that the market is on “the verge of another drop.”

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