UsableMarkets

The FT reports that Moody’s is considering a new rating system for “complex debt securities.” Instead of the familiar letter rating – where C is the worst sort of junk and AAA is the best sort – Moody’s is wondering whether a number system wouldn’t be better.

The new number system would go from 1 to 21, and would mirror the letter system. For example, a bond (er, complex debt security) rated 19 would be the same as an A rated bond (or perhaps that is a 3 would equal an A rating).

Some investors were not amused.

“Creating different ratings for products undermines what a rating is supposed to be and confuses the investor base,” said Ron D’Vari, head of structured finance CDO products and portfolio management at BlackRock. “Ratings should be standardized and triple-A should be the same across asset classes.”

This reaction mirrors the reaction we sometimes see in the interaction design world, where designers are frustrated with the 5 stars (5 apples, 5 chili peppers, etc etc etc) approach. They would like to try something new, but generally speaking 5 stars works, is flexible enough from an interface point of view, and, most importantly, everyone is familiar with it

This, of course, does not mean that we’re forever stuck with stars (or a letter rating system for bonds). But trying new ratings systems can be a tricky business, especially when the old one is so well entrenched. All the more reason for stating your rationale for a new rating system (e.g. “stars are not appropriate for user comments”) when introducing it, and leveraging things that people know already (thumbs up, thumbs down).

The problem with Moody’s new bond rating system is not that “complex debt securities” don’t deserve a new rating system, but rather that the number system they propose is so un-intuitive. Here’s hoping their next proposal is more so.

One book that deserves all the stars it gets

As always, thanks for listening.
~alex