Personally, I think this idea is technically sound, and it might save some lives. The concept's been around for years, and it has a reasonable track record; see the Iowa electronic markets. Alert reader Ian Kinman points to http://www.hsx.com/ for an additional precedent.
So Senator Wyden should stop grandstanding, already. (That is, unless he isn't "serious" about national security issues. Sheesh!)
COMMENT Some readers object that the market isn't ethical. But if the premise of the program is sound—i.e., that the market has predictive value, which the Iowa program seems to support—then it would seem to me unethical not to use it. After all, we can't have people flying airplanes into buildings or letting off dirty bombs in our cities, can we? And surely putting money into a market (as opposed to, say, torturing prisoners or abolishing civil liberties) is a reasonably harmless way to go about this task?
Others object that the market is merely a mirror for conventional wisdom; "garbage in." But the only question is whether the market has predictive value regardless of its inputs. This is a technical question, to be settled by empirical methods. Obviously, if it doesn't work, we shouldn't do it.
Alert reader Ebie makes the point that:
The IEM predicts the results of elections -- collective tallies -- not the results of a few individuals acting from a very different set of premises than most Terror Investors are going to be working with.
Which, to my mind, argues for expanding the program so it to functions as a collective tally. (Though Ebie says I'm wrong— read the thread.)
Others ask for citations. I think of this market as a subset of market-oriented knowledge engineering (e.g., here) where ideas like it are well known. As for the Iowa market, a little poking about the site yields several research papers, including this one (PDF). Alert reader Gabriel Demombynes provides an economist's perspective here.
Have at it, people! It's an interesting issue.