Rating Agencies: updating and democratising rating – a “AAA” theory
Monday, 14 November, 2011 Leave a comment
Like most right-minded people I dislike intensely the thought of individuals and firms escaping justice when they are “guilty”! But that is what WE are TOLD to accept by Governments, Regulators and the judiciary…none of whom can be relied upon (any more) to express objective “opinions” as far as the current predicament that the power-brokers of the global economy have created!
This would simply not have been possible had it not been for the opinions and strategies of those who stood to benefit most at the expense of their fellow citizens.
Are we doomed to, merely, accept that the nature of change (if any!), for the good of the majority, will be determined by the same institutions whose power and wealth would suffer!?
Turkeys voting for Christmas does spring to mind!
In mechanical engineering, for example, things like mass, strength, energy, stiffness or margin of safety are computed according to laws of physics which are the same all over the World. The PoD does not obey any such laws. It may have become a standard but it is not a law of physics. So PoD must be replaced by something more relevant. Something that not only has its roots in physics, but which is also more in line with the turbulent character of our times. Let’s not forget that ratings have been invented a century ago. The world was very different then.
So, instead of a PoD-based rating, we propose a resilience-based rating. Resilience is the capacity to withstand extreme and unexpected events and is a measurable physical quantity (for example there exist standard tests in engineering to determine the resilience of materials). In our turbulent economy, which is fast, uncertain and highly interdependent, extreme and sudden events are becoming quite common. Therefore, companies and investors should be more focused on resilience (survival) than on sheer performance. Resilience can be measured based on another physical quantity – complexity (complexity as function of structure and entropy, not the romantic “order-on-the-edge-of-chaos” version of complexity) – and on critical complexity (another physical property of systems).
Resilience of a business should be measured on a monthly or quarterly basis, not once a year! Things change very fast nowadays.
A web-based system for measuring the resilience of companies already exists:
How resilient is your business? Can you afford not to know?
- Ontonix: Rating the Rating Agencies – Moody’s “A3” rating (fitforrandomness.wordpress.com)
- Ontonix: Ratings – From an Opinion to Science (fitforrandomness.wordpress.com)
- Data Mining: Detecting patterns and extracting (fitforrandomness.wordpress.com)
- The long and winding road to: Enlightenment? (via Stupor Complexus) (fitforrandomness.wordpress.com)