The Fault of Everybody

It’s very relieving that financiers found out that flaws in the prediction of credit default rates were homeowners’ fault. All came from the fact that people cheated, actually:

“In particular, it seems that mathematical models used to predict future default rates, based on past patterns of losses, have gone wrong because they did not adjust to reflect shifts in household behaviour. (…) The issue at stake revolves around so-called delinquency rates, the proportion of people who fall behind on their debt repayments. When American households have faced hard times in previous decades, they tended to default on unsecured loans such as credit cards and car loans first – and stopped paying their mortgage only as a last resort. However, in the last couple of years households have become delinquent on their mortgages much faster than trends in the wider economy might suggest. That is particularly true of the less creditworthy subprime borrowers. More­over, consumers have stopped paying mortgages before they halt payments on their credit cards or automotive loans – turning the traditional delinquency pattern on its head. As a result, mortgage lenders have started to face losses at a much earlier stage than in the past.” (from “Last year’s model: stricken US homeowners confound predictions”, Financial Times, January 31 2008)

Very good. But wait. Maybe what people actually did was just to learn how to be affected by credit scoring in a most reasonable manner, since rates depend on FICO scores and only credit card data is used to calculate them. Well, just an hypothesis (a sociologist of credit devices would have put it that way).

(More indeed here.)


  1. Yes, very interesting cases study. I think that Martha has a lot of mileage with this one. The general notion of ‘playing the model’ or ‘developing an optimal response to models’ is fascinating and maybe can help us to understand the general phenomenon of gaming better.
    One little example is about people gaming the Amazon comments system:

  2. Yuval,

    But perhaps the real problem here is that those financiers seem to be trying to investigate what people do without even caring about the fact that people might be doing what the devices financiers themselves throw at them make them do. So, yes, there is a problem of “reflexivity playing with models”, yes. But there is a more serious problem: blatant excess of cheek.

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