Perhaps The Problem with Rating Agencies is the Concept of Rating
In a recent issue, The Economist discussed the financial markets’ reliance on ratings agencies. In the piece they unpack the reasons for this reliance and the alternatives going forward.
Reading it spurred a thought: perhaps the issue lies not with the ratings agencies but with the concept of rating itself. Boiling down complexities to a single note is always perilous. In the best cases, blind spots remain as subjects emerge with new types of complexity not considered when the model was made.
But ratings remain because they’re easy. The Economist doesn’t see them leaving anytime soon because institutional investors are “reluctant to do their own credit analysis.” Even when people know ratings are faulty, people choose to believe in ratings because it’s more appealing that dealing with complexity itself.
Further, the market has evolved to a speedy form dependent on easy, one-size-fits-all, business assessment. If investors were to perform the work of ratings agencies and understand the complexity, their data would be dated by the time they finished.
And this isn’t limited to financial markets. Pick a reductionist rating start interrogating it: movie age ratings, Nielsen television ratings, and even an overemphasis on calories as a dietary indicator in the 1990s. All of these might start out nicely, but they eventually falter. Nielsen underweights youth programming as it can’t account for digital viewing habits. Focusing on calories ignores the impact of sugar or fats, let alone completely overlooks any aspect of nutrition.
Does anyone know of a book or article that explores the perils of one-dimensional ratings in general?
