Bruce Carruthers
John D. MacArthur Chair and Professor of Sociology
Director, Buffett Institute for Global Studies
Weinberg College of Arts & Sciences / Sociology
Bruce Carruthers is the John D. MacArthur chair and professor of sociology at Weinberg College of Arts and Sciences and director of the Buffett Institute for Global Studies at Northwestern University. His books include Money and Credit, which analyzes the foundation of consumer and corporate credit markets. His current projects include a study of the historical evolution of credit as a problem in the sociology of trust.
Videos by Bruce Carruthers
Jacked Up Ratings: Problems with Quantifying Trust
Applications
Contributor / Bruce Carruthers
Bruce Carruthers
Sociology
Credit,Government,Measurement,Sharing Economy
BUMPER: Jacked Up Ratings: Problems with Quantifying Trust
One of the things that happens is, as we rely on quantitative measure of underlying features, like a quantitative measure or score that measures somebody’s creditworthiness or how trustworthy they are.
As these scores become consequential, as people start to take them seriously, and as they are used in actual important decision-making, there’s an incentive for people to corrupt them, to game them, to stop paying attention to what it is they’re measuring and instead focus on the measure.
And there are a couple of really clear examples of this becoming a big problem.
And one was, in 2008, people realized that the bond rating scores that had been attached by Moody’s and S&P and Fitch and whatnot, and that were attached to asset-backed securities based on subprime mortgages.
That the investment bankers and the rating agencies worked together to try to jack up the ratings as high as possible so that whenever outside investors looked at a security, they saw, “Oh, it’s AAA. Well, that’s great.”
Had they been savvy (and now they’re very savvy because they know what the problem is), they might have realized that, in fact, that AAA rating was a score that was kind of jacked up.
And so, I think in a world in which the quantitative information becomes increasingly important, what you have to do is be a sophisticated consumer of numbers and always be mindful of their limits and vulnerabilities. And you simply cannot take them too seriously.
BUMPER: Re-Engineering Trust with Peer-to-Peer Lending
Peer-to-peer lending is a very interesting experiment that, again, takes advantage of the IT revolution.
It used to be that if you were going to do peer-to-peer lending, it was going to happen in your small hometown. Those were your peers.
Those were the people who could trust you, who knew about your business, who might be willing to lend to you or whose business you knew about and to whom you might be willing to lend.
And what we’ve done is, we’ve sort of disconnected what used to be the high correlation between social knowledge and geographic concentration.
And so, peer-to-peer and similar models are re-engineering some of the differences between relational lending and relational trust and generalized trust in very interesting ways.
It’s a re-articulation of the connection between personal and impersonal. It’s a way of saying, “We can personalize what would otherwise be a default impersonal situation. We can create peers out of people that aren’t even in the same country.
One of the things that happens is, as we rely on quantitative measure of underlying features, like a quantitative measure or score that measures somebody’s creditworthiness or how trustworthy they are.
As these scores become consequential, as people start to take them seriously, and as they are used in actual important decision-making, there’s an incentive for people to corrupt them, to game them, to stop paying attention to what it is they’re measuring and instead focus on the measure.
And there are a couple of really clear examples of this becoming a big problem.
And one was, in 2008, people realized that the bond rating scores that had been attached by Moody’s and S&P and Fitch and whatnot, and that were attached to asset-backed securities based on subprime mortgages.
That the investment bankers and the rating agencies worked together to try to jack up the ratings as high as possible so that whenever outside investors looked at a security, they saw, “Oh, it’s AAA. Well, that’s great.”
Had they been savvy (and now they’re very savvy because they know what the problem is), they might have realized that, in fact, that AAA rating was a score that was kind of jacked up.
And so, I think in a world in which the quantitative information becomes increasingly important, what you have to do is be a sophisticated consumer of numbers and always be mindful of their limits and vulnerabilities. And you simply cannot take them too seriously.
BUMPER: Re-Engineering Trust with Peer-to-Peer Lending
Peer-to-peer lending is a very interesting experiment that, again, takes advantage of the IT revolution.
It used to be that if you were going to do peer-to-peer lending, it was going to happen in your small hometown. Those were your peers.
Those were the people who could trust you, who knew about your business, who might be willing to lend to you or whose business you knew about and to whom you might be willing to lend.
And what we’ve done is, we’ve sort of disconnected what used to be the high correlation between social knowledge and geographic concentration.
And so, peer-to-peer and similar models are re-engineering some of the differences between relational lending and relational trust and generalized trust in very interesting ways.
It’s a re-articulation of the connection between personal and impersonal. It’s a way of saying, “We can personalize what would otherwise be a default impersonal situation. We can create peers out of people that aren’t even in the same country.
How Credit Systems Guarantee Trust: Key Findings
Research
Contributor / Bruce Carruthers
Bruce Carruthers
Sociology
Credit,Government,Measurement,Regulation
Trust is an everyday problem. It’s ubiquitous. It’s something that we face all the time, but it’s not always something that we consciously think about.
These kinds of practical rules of thumb really drive the kind of calculative, quick evaluative decisions that cab drivers make every day, thousands of times.
So, credit is a big thing, and trust in credit is an absolutely crucial issue.
Lenders are vulnerable to the borrowers, depending on the size of the loan, and they’re uncertain about whether the borrowers will be willing and able to repay the loan in the future.
And the thing about credit is that modern economies absolutely depend on credit. Credit is the lifeblood of the consumer economy.
There would be no housing market; there would be no market in cars; there would be no sales and durable goods if people weren’t able to borrow money through credit cards, through mortgage loans, through car loans, and so forth to facilitate those purchases.
So, in the issue of credit, sociologists have studied how lenders actually evaluate the trustworthiness of potential borrowers. And this is done by some people in the context of bankers who are looking at customers who want personal loans or who want small-business loans — stuff like that.
And what they found is that the bankers also were concerned deeply about the trustworthiness of the borrowers.
So, they do collect a lot of data. But it turns out that even when you’ve got all the quantitative information you possibly want — you’ve got the credit scores; you’ve got the loan-to-value ratio; you’ve got all that kind of stuff — it still turns out that sometimes the numbers are equivocal.
What are called “relational proxies” become very important. And that’s a situation where the lending officer will kind of ask themselves, “Do I trust this borrower? Do I think that they are of good character? Do I believe that they’re being really sincere when they say that they plan to repay the loan?”
Those studies of credit focus on situations where lenders and borrowers can actually meet face-to-face, or one person can look across the table at another person and decide whether they’re trustworthy.
But we know that credit in modern society has become much bigger than that. It now is mass credit. Millions and even billions of people are obtaining credit, and they’re getting it from folks who have never met them, will never meet them, and will never sit across the table from them.
How is this possible? Well, the answer is, what we have developed to manage the trust problems in mass credit is a giant informational apparatus that provides lots of information about would-be borrowers and their trustworthiness to would-be lenders and doesn’t depend so much on face-to-face interactions and direct contact.
So, the importance of this kind of informational apparatus is really made obvious in studies of how credit card systems, which are very common in the West and which have been around in the U.S. since the 1950s, have migrated to the post-socialist societies of Central and Eastern Europe — places like Russia.
And what happened was, it turns out that to build a credit card system in Russia is very difficult as compared to the United States.
It turned out that a lot of this background information system that we in the West rely on to track people’s credit records, to keep score of whether they bounce checks and whether they fall behind on payments and how good they are and how in debt they are — that apparatus didn’t exist in places like Russia and had to be built from the ground up.
And it’s that apparatus much more than old, face-to-face direct contact between lenders and borrowers that proves to be critical for the development of mass credit in both Russia but also in the United States.
So, in my own research, I’ve been very interested in the emergence, the historical emergence, of this giant informational apparatus that undergirds modern credit cards. But it turns out it undergirds lots of other forms of credit as well: bond ratings, small business credit, and whatnot.
And the big shift that I see — that started in the middle of the 19th century and which continues to this day — is a shift from credit and issues of trust that previously was posed as a matter of character: Is somebody trustworthy? How do I know that someone in their heart is trustworthy and will repay the debts? How am I connected to that person directly?
We shifted from a world in which that was how you dealt with trust to a world in which, now, we don’t worry about whether we know someone, and we don’t worry so much about their character. But we rely very heavily on all kinds of quantitative, standardized information that has been gathered and processed and interpreted by someone.
It’s no longer a world in which you as a lender have to worry about the five or ten or twenty people that you can know personally a lot about. Now you can scale it up so that you can judge the creditworthiness of millions of people — billions of people! — millions of businesses.
It’s also information that migrates in the sense that it can be used in other contexts. And so, when bond ratings were invented, they got adopted by regulatory agencies. So, public policy became beholden to bond ratings, and they got used in private contracts.
So, FICO scores, credit scores, bond ratings — these are all highly quantitative ways of evaluating trustworthiness, and they really have become how credit and trust are governed in the modern world.
These kinds of practical rules of thumb really drive the kind of calculative, quick evaluative decisions that cab drivers make every day, thousands of times.
So, credit is a big thing, and trust in credit is an absolutely crucial issue.
Lenders are vulnerable to the borrowers, depending on the size of the loan, and they’re uncertain about whether the borrowers will be willing and able to repay the loan in the future.
And the thing about credit is that modern economies absolutely depend on credit. Credit is the lifeblood of the consumer economy.
There would be no housing market; there would be no market in cars; there would be no sales and durable goods if people weren’t able to borrow money through credit cards, through mortgage loans, through car loans, and so forth to facilitate those purchases.
So, in the issue of credit, sociologists have studied how lenders actually evaluate the trustworthiness of potential borrowers. And this is done by some people in the context of bankers who are looking at customers who want personal loans or who want small-business loans — stuff like that.
And what they found is that the bankers also were concerned deeply about the trustworthiness of the borrowers.
So, they do collect a lot of data. But it turns out that even when you’ve got all the quantitative information you possibly want — you’ve got the credit scores; you’ve got the loan-to-value ratio; you’ve got all that kind of stuff — it still turns out that sometimes the numbers are equivocal.
What are called “relational proxies” become very important. And that’s a situation where the lending officer will kind of ask themselves, “Do I trust this borrower? Do I think that they are of good character? Do I believe that they’re being really sincere when they say that they plan to repay the loan?”
Those studies of credit focus on situations where lenders and borrowers can actually meet face-to-face, or one person can look across the table at another person and decide whether they’re trustworthy.
But we know that credit in modern society has become much bigger than that. It now is mass credit. Millions and even billions of people are obtaining credit, and they’re getting it from folks who have never met them, will never meet them, and will never sit across the table from them.
How is this possible? Well, the answer is, what we have developed to manage the trust problems in mass credit is a giant informational apparatus that provides lots of information about would-be borrowers and their trustworthiness to would-be lenders and doesn’t depend so much on face-to-face interactions and direct contact.
So, the importance of this kind of informational apparatus is really made obvious in studies of how credit card systems, which are very common in the West and which have been around in the U.S. since the 1950s, have migrated to the post-socialist societies of Central and Eastern Europe — places like Russia.
And what happened was, it turns out that to build a credit card system in Russia is very difficult as compared to the United States.
It turned out that a lot of this background information system that we in the West rely on to track people’s credit records, to keep score of whether they bounce checks and whether they fall behind on payments and how good they are and how in debt they are — that apparatus didn’t exist in places like Russia and had to be built from the ground up.
And it’s that apparatus much more than old, face-to-face direct contact between lenders and borrowers that proves to be critical for the development of mass credit in both Russia but also in the United States.
So, in my own research, I’ve been very interested in the emergence, the historical emergence, of this giant informational apparatus that undergirds modern credit cards. But it turns out it undergirds lots of other forms of credit as well: bond ratings, small business credit, and whatnot.
And the big shift that I see — that started in the middle of the 19th century and which continues to this day — is a shift from credit and issues of trust that previously was posed as a matter of character: Is somebody trustworthy? How do I know that someone in their heart is trustworthy and will repay the debts? How am I connected to that person directly?
We shifted from a world in which that was how you dealt with trust to a world in which, now, we don’t worry about whether we know someone, and we don’t worry so much about their character. But we rely very heavily on all kinds of quantitative, standardized information that has been gathered and processed and interpreted by someone.
It’s no longer a world in which you as a lender have to worry about the five or ten or twenty people that you can know personally a lot about. Now you can scale it up so that you can judge the creditworthiness of millions of people — billions of people! — millions of businesses.
It’s also information that migrates in the sense that it can be used in other contexts. And so, when bond ratings were invented, they got adopted by regulatory agencies. So, public policy became beholden to bond ratings, and they got used in private contracts.
So, FICO scores, credit scores, bond ratings — these are all highly quantitative ways of evaluating trustworthiness, and they really have become how credit and trust are governed in the modern world.
Differentiating Trust and Trustworthiness: A Sociologist’s Perspective
Foundations
Contributor / Bruce Carruthers
Bruce Carruthers
Sociology
Government,Institutions and Context,Legal Guarantees,Reputation Management,Social Psychology,Vulnerability
As a social scientist, I’m very interested in trust as it concerns people because really society, human cooperation, human coordination, all of the activities that we do together, really depend on trust.
And you might kind of wonder, well, trust sounds a bit like faith? You know, we’re just going to take people on faith.
And don’t we have a bunch of ways of coordinating our activity and making sure that the left hand knows what the right hand is doing, and I can figure out what’s going on vis-a-vis my employer or all the people that I interact with — and don’t we have a bunch of formal coordination devices like contracts or instructions or standard operating procedures?
Why aren’t those good enough? Why do we have to go beyond that and trust people? And there’s a couple of reasons for this. And one of them is that, as wonderful as these formal devices are, they really do have limits.
And one of the reasons is that contracts and other instructions, lists, standard operating procedures, all of these devices — they’re always incomplete; that is, the world is more complicated and unpredictable than we can anticipate.
And so, stuff will happen that will effect whatever it is you’re doing with these other people. It will have an impact on your ability to execute whatever it is you’re trying to do, and it’s not going to be in the contract what’s up.
You might think to yourself, “Well, maybe trust isn’t such an issue if we go to the marketplace.” Let’s think about markets and capitalism and self-interest and competition — maybe that’s a world in which contracts and other formal devices will be sufficient.
And once you’ve got an airtight contract, you don’t have to worry about the personal character or the trustworthiness of the people you’re dealing with, because you’ve got a good contract and you hired a good lawyer.
So, the most famous person who thought about this sphere, of course, was Adam Smith in his famous book The Wealth of Nations, which really did talk about the virtues of capitalist production and competitive markets and so forth.
And I think it’s very telling that before he wrote The Wealth of Nations, Adam Smith wrote a book on The Theory of Moral Sentiments.
And in this previous book, he posited that people are linked through strong bonds of sympathy and empathy and trust, and that on top of this, we’re able to have markets and capitalism and all that kind of fun stuff.
It was clear to me (and I think clear to Smith) that some measure of some baseline, some foundation of trust is very important even in social settings where we might think that the issue of trust can be solved or avoided.
You might want to ask, when does trust arise? I’ve talked about it as kind of ever-present — it’s all over the place. But really, there’s two elements that drive trust situations.
One of them is uncertainty, and the other is vulnerability — that is, people are uncertain about what others are going to do (they don’t know what’s going to happen in the future), and they’re vulnerable to what those other people do to the extent that their interests and those other people’s actions are intertwined.
So, the trick for dealing with a trust situation is really addressing these two key elements: either trying to deal with uncertainty by acquiring more information and learning (or trying to figure out) what is likely to happen in the future.
…Or by managing your vulnerabilities and thinking about ways to mitigate or reduce the impact (or the potential harm) that others’ actions, future actions, could have on your interests.
So, this kind of sets up a generic recipe book for how to deal with trust situations. How do people trust?
People rely on a lot of heuristics, rules of thumb, to decide who is trustworthy and who is not, and that distinction is really important because you can’t go through the world trusting everyone, and you can’t function in the world if you trust no one.
And so, what you have to do at the simplest level, is kind of put everyone into two bins: there’s people that are trustworthy; there is people who are not. And you want to be able to trust the trustworthy and avoid those who are not trustworthy
I’m going to offer a couple of distinctions that help clarify the discussion of trust. And one of them is the difference between trust and trustworthiness. And this really speaks to who is doing the trusting and who is being trusted.
One party trusts the other, and the other party may or may not be trustworthy — that is, they deserve the trust. But someone who is trustworthy may not be trusted, and someone who is trusting may end up trusting someone who is not trustworthy.
So, these two things have to be kept separate. Another distinction is the distinction between generalized and relational trust.
Generalized trust really speaks to the question of how you deal with strangers. Do you trust abstract institutions? Do you trust the average citizen that you might run into on the street?
That kind of a thing — where you’re really dealing with someone with whom you have no relationship and about whom you have no prior information. What kind of ambient or generic level of trust do you have?
Relational trust is, what happens after you start to get to know someone? What happens after you start to develop a social relationship?
You have a history together; you have contracts; you have prior transactions. That is a very particular and non-anonymous form of trust, and it is really driven by the nature of the interaction that you have with that individual.
And you might kind of wonder, well, trust sounds a bit like faith? You know, we’re just going to take people on faith.
And don’t we have a bunch of ways of coordinating our activity and making sure that the left hand knows what the right hand is doing, and I can figure out what’s going on vis-a-vis my employer or all the people that I interact with — and don’t we have a bunch of formal coordination devices like contracts or instructions or standard operating procedures?
Why aren’t those good enough? Why do we have to go beyond that and trust people? And there’s a couple of reasons for this. And one of them is that, as wonderful as these formal devices are, they really do have limits.
And one of the reasons is that contracts and other instructions, lists, standard operating procedures, all of these devices — they’re always incomplete; that is, the world is more complicated and unpredictable than we can anticipate.
And so, stuff will happen that will effect whatever it is you’re doing with these other people. It will have an impact on your ability to execute whatever it is you’re trying to do, and it’s not going to be in the contract what’s up.
You might think to yourself, “Well, maybe trust isn’t such an issue if we go to the marketplace.” Let’s think about markets and capitalism and self-interest and competition — maybe that’s a world in which contracts and other formal devices will be sufficient.
And once you’ve got an airtight contract, you don’t have to worry about the personal character or the trustworthiness of the people you’re dealing with, because you’ve got a good contract and you hired a good lawyer.
So, the most famous person who thought about this sphere, of course, was Adam Smith in his famous book The Wealth of Nations, which really did talk about the virtues of capitalist production and competitive markets and so forth.
And I think it’s very telling that before he wrote The Wealth of Nations, Adam Smith wrote a book on The Theory of Moral Sentiments.
And in this previous book, he posited that people are linked through strong bonds of sympathy and empathy and trust, and that on top of this, we’re able to have markets and capitalism and all that kind of fun stuff.
It was clear to me (and I think clear to Smith) that some measure of some baseline, some foundation of trust is very important even in social settings where we might think that the issue of trust can be solved or avoided.
You might want to ask, when does trust arise? I’ve talked about it as kind of ever-present — it’s all over the place. But really, there’s two elements that drive trust situations.
One of them is uncertainty, and the other is vulnerability — that is, people are uncertain about what others are going to do (they don’t know what’s going to happen in the future), and they’re vulnerable to what those other people do to the extent that their interests and those other people’s actions are intertwined.
So, the trick for dealing with a trust situation is really addressing these two key elements: either trying to deal with uncertainty by acquiring more information and learning (or trying to figure out) what is likely to happen in the future.
…Or by managing your vulnerabilities and thinking about ways to mitigate or reduce the impact (or the potential harm) that others’ actions, future actions, could have on your interests.
So, this kind of sets up a generic recipe book for how to deal with trust situations. How do people trust?
People rely on a lot of heuristics, rules of thumb, to decide who is trustworthy and who is not, and that distinction is really important because you can’t go through the world trusting everyone, and you can’t function in the world if you trust no one.
And so, what you have to do at the simplest level, is kind of put everyone into two bins: there’s people that are trustworthy; there is people who are not. And you want to be able to trust the trustworthy and avoid those who are not trustworthy
I’m going to offer a couple of distinctions that help clarify the discussion of trust. And one of them is the difference between trust and trustworthiness. And this really speaks to who is doing the trusting and who is being trusted.
One party trusts the other, and the other party may or may not be trustworthy — that is, they deserve the trust. But someone who is trustworthy may not be trusted, and someone who is trusting may end up trusting someone who is not trustworthy.
So, these two things have to be kept separate. Another distinction is the distinction between generalized and relational trust.
Generalized trust really speaks to the question of how you deal with strangers. Do you trust abstract institutions? Do you trust the average citizen that you might run into on the street?
That kind of a thing — where you’re really dealing with someone with whom you have no relationship and about whom you have no prior information. What kind of ambient or generic level of trust do you have?
Relational trust is, what happens after you start to get to know someone? What happens after you start to develop a social relationship?
You have a history together; you have contracts; you have prior transactions. That is a very particular and non-anonymous form of trust, and it is really driven by the nature of the interaction that you have with that individual.