As I look around at what is happening in the world today, I keep seeing evidence that it all comes down to trust. As someone who spent a great deal of time working on information security, the subject of trust is one that I tried to design for, but I always regarded trust as a boolean value. In reality, trust is more complicated. Sometimes it is a boolean value, and the goal is to identify and preserve the value of this, and in other cases it should be thought of as a multidimensional object. For example, I might trust someone to competently cut my hair, but that doesn’t mean I would trust them to surgically remove a tumor. Trust is sometimes situational, and sometimes can be measured.
A long time ago a banker explained to me that bankers didn’t hold money - they were in the business of managing trust. They conveyed trust to their depositors and investors, and they held trust in their borrowers. In order to make a business out of this, they had to be shrewd in estimating the value of risk. In the old days they were able to apply their knowledge of social relationships and markets in order to come up with reasonable values. Bankers in a community generally knew who was a good risk for a loan, either because of their relationship in business or through their track record in fulfilling previous commitments.
Unfortunately, the mortgage business was taken over by a set of people who had no way to accurately quantify trust. This is one of those areas where sound human judgement was replaced by algorithmic quantitative analysis, and the results have not been pretty. I always looked suspiciously at the “science” of risk assessment. I’m amused by the fact that the wikipedia entry on risk assessment contains an automatically generated message saying that it contains “weasel words”.
The underlying problem in risk assessment is trying to estimate the probability of an extremely rare event - perhaps an event that has never even been observed to happen. Such estimates are by their very nature wild speculations, with variances that are larger than the mean. Any estimate of the probability of such an event has to be taken with a grain of salt the size of a dump truck.
The application of unsound algorithmic practices and gut instincts has resulted in a massive erosion of trust in our society. In the pursuit of profits, mortgage lenders through out sound predictive methods and substituted unsound analytic techniques instead. When Bush stands up and says that our economy is in a crisis, everyone remembers that he used the same argument for going to war in Iraq. When banks start to question whether borrowers will pay back their loans, they start to hoard their assets and financial liquidity evaporates. When investors (including myself) see a rapid and unpredictable erosion of value in the stock market, they pull out rapidly, further eroding the value of the stock market.
The question is - what will restore this vacuum of trust? Trust is something that is easily lost, but hard to gain. What can be lost in moments will sometimes take years to recover. The U.S. currency is imprinted with the slogan “In God we trust”. That may be true for some, but I think the correct slogan would be “In experience we trust”. We need some better experiences in order to regain our trust.