From uncertainty toward risk: the case of credit ratings

Modern theories of rational decision-making distinguish between certainty, risk and uncertainty. When the consequences of action cannot be calculated, decision-makers confront uncertainty rather than risk. This paper examines how, as a practical accomplishment, uncertain decisions are shifted in the direction of risk, focusing on the history of credit ratings. Decision-making about credit is fraught with uncertainties, and credit rating was invented in the nineteenth century in the USA to help make those uncertainties more tractable. Credit rating methods spread widely, even before their accuracy or efficacy had been demonstrated. The origins of credit rating reveal problems and limits that re-emerged during the financial crisis of 2008, when rating agencies performed very poorly.