Crowdsourced Ratings?
I was going through some emails this evening and reading the comments on my disintermediating banking post. One comment in particular, by Jeremy, stuck with me: “Well, it’d be hard for the average consumer to evaluate default risk wouldn’t it? Unless we want to go back to the rating agencies…and we all know how well that ended up…” Anyway, I was thinking about this and I wonder if that’s not the sort of thing you could crowdsource? I mean basically, as I understand it, a rating is a subjective thing, so couldn’t you just ask enough folks and average out their replies?
Again, this is an example of a subject I don’t actually know anything about, so someone who does feel free to smack me down in the comments.
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I think this is what freerisk is doing.
http://freerisk.org/
Slightly different perhaps but along the same lines I think.
There’s a bit of a privacy issue here if I understand what you’re suggesting – crowdsource the default risk of someone’s personal mortgage, and on what basis? Would this kind of crowdsourcing be any different from the market in general, which is supposed to provide the same function? I do think that one bit of necessary disintermediation is the phasing out of securitized home loans, they’re too far distant from the loan itself to be safe as we’ve seen.
I’ll merely second Jon with the reference to freerisk.org, who are creating the structured data necessary for individuals to evaluate company performance. The great hope of releasing data reported to the SEC via EDGAR Online ended up too much unstructured data for people to understand and analyze. Even paid investment analysts could not keep up, which led to a lot of issues in finance today: too easy for companies to hide their true performance in a mess of real data.
Hopefully we will see more skins of financial data and analysis in the future.
(A note: consider how the Guardian newspaper in the UK crowdsourced their investigation into the UK MPs expense scandal: http://www.niemanlab.org/2009/06/four-crowdsourcing-lessons-from-the-guardians-spectacular-expenses-scandal-experiment/ )
@Jon: Thanks, will check it out.
@Michael: I should have been more clear, I was thinking ratings for companies, not individuals looking to get loans (though that’s interesting to think about as well). You were right to make that assumption, since in that other post I was write about peer-to-peer banking, however, so that’s my bad.
@Taylor: Good points.
This is exactly the kind of thing you can outsource. Basically any place that relies on “experts” but is inherently based on multiple subjective factors, can instead be outsourced to the crowd in the cloud. If you can get enough people making their own judgments, you approach the invisible hand and the variances from subjective expertise balance out.
The privacy issue is non-trivial (and it isn’t any easier for companies–imagine your competitors tracking your financing requests), but with third-party verification of claims, you can accumulate sufficient anonymous credentials to suffice.
In fact, you could attach realtime credentials to the debt, such as whether or not they are still employed, marriage status, etc. Those claims could be attached by debtors for a discount on the loan and thanks to the efficiencies of the ‘net, they could seamlessly travel in a market buying/selling portions of the debt as they go. This would give a level of transparency unheard of in today’s static commodity market–where no one can actually tell which loans are toxic.
Btw, crowdsourcing finance is definitely happening. You just haven’t bumped into it yet.
The biggest bottleneck is regulation. You can’t just buy & sell these sorts of products.
http://www.Kiva.com can do it because they don’t allow you to profit from your loans. http://www.ibank.com is operating at a different level, for businesses (and I don’t know how they get around regulations). From what I’ve seen, I think http://www.prosper.com/ is leading the pack in the kind of open-ended loans you are talking about, and they’ve had major breakthroughs getting approval from regulators.
What I haven’t yet seen are crowdsources markets that let you make the financial “sausages” that really let you diversify risks. That is, use the crowd to spread the risk of a $10,000 loan over 1,000 people who each invest just $10.
If that happened in a verifiable market, you could even support a market for FDIC-style insurance to the creditors: diversify the assets at risk across many many loans and diversify the debts at risk across many debtors and you should have a systemically robust marketplace where any given default is certain to be relatively small and absorbable. (Unlike the mess we saw collapse last year.)
Goldman Sachs Asset Management was recently looking at using credit spreads to assess risk for their clients, rather than relying on the rating agencies.
What better form of crowd-sourcing than a free market?
(http://ftalphaville.ft.com/blog/2009/05/05/55464/ratings-babies-and-bathwater-asset-management-edition/)