Decision Making Using Rating Systems: When Scale Meets Binary

Anna E. Bargagliotti and Lingfang Li
Authors registered in the RePEc Author Service: Lingfang (Ivy) Li ()

MPRA Paper from University Library of Munich, Germany

Abstract: Rating 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.

Keywords: rating; ranking; preference; asymmetric information (search for similar items in EconPapers)
JEL-codes: D70 D82 (search for similar items in EconPapers)
Date: 2009-08-25
New Economics Papers: this item is included in nep-cdm and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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