Decision Making Using Rating Systems: When Scale Meets Binary
AbstractRating systems measuring quality of products and services (i.e., the state of the world) are widely used to solve the asymmetric information problem in markets. Decision makers typically make binary decisions such as buy/hold/sell based on aggregated individuals' opinions presented in the form of ratings. Problems arise, however, when different rating metrics and aggregation procedures translate the same underlying popular opinion to different conclusions about the true state of the world. This paper investigates the inconsistency problem by examining the mathematical structure of the metrics and their relationship to the aggregation rules. It is shown that at the individual level, the only scale metric (1,. . . ,N) that reports people's opinion equivalently in the a binary metric (-1, 0, 1) is one where N is odd and N-1 is not divisible by 4. At aggregation level, however, the inconsistencies persist regardless of which scale metric is used. In addition, this paper provides simple tools to determine whether the binary and scale rating systems report the same information at individual level, as well as when the systems di®er at the aggregation level.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 16947.
Date of creation: 25 Aug 2009
Date of revision:
rating; ranking; preference; asymmetric information;
Find related papers by JEL classification:
- D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-08-30 (All new papers)
- NEP-CDM-2009-08-30 (Collective Decision-Making)
- NEP-UPT-2009-08-30 (Utility Models & Prospect Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Klein, Tobias J. & Lambertz, Christian & Spagnolo, Giancarlo & Stahl, Konrad O., 2006.
"Last Minute Feedback,"
Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems
62, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- Sen, Amartya Kumar, 1970. "The Impossibility of a Paretian Liberal," Scholarly Articles 3612779, Harvard University Department of Economics.
- Sen, Amartya, 1970. "The Impossibility of a Paretian Liberal," Journal of Political Economy, University of Chicago Press, vol. 78(1), pages 152-57, Jan.-Feb..
- Saari, Donald G., 1999. "Explaining All Three-Alternative Voting Outcomes," Journal of Economic Theory, Elsevier, vol. 87(2), pages 313-355, August.
- John Morgan & Phillip C. Stocken, 2008. "Information Aggregation in Polls," American Economic Review, American Economic Association, vol. 98(3), pages 864-96, June.
- Crawford, Vincent P & Sobel, Joel, 1982.
"Strategic Information Transmission,"
Econometric Society, vol. 50(6), pages 1431-51, November.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.