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When I first heard about LIBOR in 2002, I was surprised that the number is just based on a survey of bankers. Surely there would be accuracy issues with that?

When I first heard about LIBOR in 2002, I was surprised that the number is just based on a survey of bankers. Surely there would be accuracy issues with that? But at that time I was young and had no finance experience, so though that the adults in the room knew best. Turns out not! I don't think the base problem is that people shaded their numbers one way or another, it's that the system is designed wrong.

cromulent 5y ago
The Corruption Index is similar - it’s based on how corrupt people think a nation is. Nothing to do with how much actual corruption exists.
- sokoloff 5y ago
  It seems overwhelmingly likely that "how corrupt people think a nation is" does have "[something] to do with how much actual corruption exists".
  - deleted 5y ago
    [deleted]
  - tacostakohashi 5y ago
    Kind of... but certain countries have done a great job of gaming the system, particularly one of the countries that is currently ranked #3.
    - Shorel 5y ago
      Switzerland?
  - refurb 5y ago
    Not in the least. Look at crime statistics versus how safe people feel. People say “crime is worse than 20 years ago” when the murder rate is 1/5th. Perception =\= reality.
  - lvmz 5y ago
    Just how much corruption is known. Even if you make the assumption that people in aggregate can generally assess whether corruption exists somewhere, it'd be harder to measure the 'severity' that way. I actually think you're probably correct that people's perceptions of corruption have some connection to reality, but I think the more fundamental problem with such a scale is boiling a complicated reality like corruption into a single corruption number, which seems pretty silly on its face.
  - Shorel 5y ago
    Technically yes, but on the short term, there is a lot of lag to this signal. Even in the not so short term. That is: people's perception can be anything from a few months to a few decades outdated to the current state. Usually, every four years, a new party in power can change the trend. So, it is overwhelmingly likely that something better can be found to reflect this reality.
  - riffraff 5y ago
    Up to a point. A lot of these indexes are PR and the people who answer them have motives to rate one way or the other (e.g. you are an opinionated journalist and you want the current government to look bad). There's usually something weird going on with some of these indexes if you compare statistics with opinion-survey-based stats.
kaesar14 5y ago
This was also my impression learning about it as I was starting to learn about global finance in high school. Even them it seemed ridiculous. I wonder how many more systems currently in place are based on such foolish promises and easily exploited foundations of trust.
- boringg 5y ago
  Fiat currency is based on trust - so was the gold standard to a degree. Trust is an important part of society. We rip trust away in our societal institutions and we are left in a terrible existence. If you boil everything down - trust a critical function. Your day is filled with trust of functioning. Without it you would live in pure chaos. I find these arguments facile.
- cardiffspaceman 5y ago
  Pre-SoundScan record sales numbers?
- NoboruWataya 5y ago
  Trust is central to the financial system, for better or worse. The whole thing is based on trust - whether it's trust in the person on the other end of the phone, trust in the big-name bank that person works for, or trust in that bank's regulator. This seems stupid to some tech people, who try to disrupt it by creating trustless systems such as distributed ledgers. But trust keeps on creeping back into the system. There are crypto custodians, crypto brokers, crypto exchanges, all of whom you have to trust to some extent. There is crypto lending. I wouldn't be surprised if we eventually have the Bitcoin Interexchange Offered Rate decided by a handful of the biggest exchanges.
  - FredPret 5y ago
    Or we can call it the Hash-based Ordinary Daily Lending Rate
    - robertlagrant 5y ago
      Yes. You win HN today.
SkyMarshal 5y ago
The more I've learned of the banking system, the more examples of this I see. It seems that much of the banking system was designed by bottom-line-oriented, non-systems-thinkers, who just wanted an immediate, good-enough solution to a problem. Accuracy, reproducibility, scalability, systemic integrity, and similar concerns often weren't a factor.
- tlb 5y ago
  It evolved from a small system where the people all knew each other and went to the same few public schools where everything also ran on the honor system. It wasn't a bad design for its original scale & context. Those dumb bankers. We computer scientists would never design something that failed to scale through 5 decades.
  - deleted 5y ago
    [deleted]
  - pgwhalen 5y ago
    I'd suggest that most of society still runs on the honor system (especially finance and law), it's just more abstracted away from interpersonal relationships than it used to be. The existence of things like encryption often deceives us hackers about what the real foundation is.
    - derefr 5y ago
      Every day when I pass through the lobby of my apartment building, I think about the fact that our lettermail gets locked up tight in individually-keyed mailboxes, but — due to our building not being "large enough to qualify" for a parcel dropbox — large high-value parcels instead just get left lying on the lobby floor beside the mailboxes, with the matter of not stealing other people's parcels left entirely up to the honor system. (And yes, this is the same lobby that arbitrary guests will walk through to the elevator if buzzed in by any tenant who hears the word "Amazon" muttered vaguely through their phone.) Of course, the locks of those individually-keyed mailboxes are also probably rakeable or bumpable or some other two-second attack. But at least that deters people who never bothered to look into how locks work.
CraigJPerry 5y ago
>> I was surprised that the number is just based on a survey of bankers The numbers that LIBOR is measuring ultimately represent a human’s opinion. Well, it’s the opinions of several humans then the highest and lowest opinions get discarded and the rest averaged. It’s not measuring a value derived deterministically from some inputs, so how else could you capture it?
- DwnVoteHoneyPot 5y ago
  It's being replaced by historical market transaction data. Like stocks prices are based on last price.
  - CraigJPerry 5y ago
    We’re not producing cola anymore, everyone should use water instead. SONIA is just one rate - last nights GBP overnight rate. LIBOR benchmark currencies have tenors, the future borrowing rates at different maturities. They’re different things - so different that a “synthetic LIBOR” rate is now produced in order to help transition instruments that can’t rely only on the historical overnight rate like SONIA. It’s true that LIBOR is being replaced (although a level 1 submission to ICE LIBOR was already based on value weighted averages from eligible transactions - it’s just that a level 3 expert judgement could override it) - but it’s not being replaced by something comparable. It’s being Replaced by an entirely different benchmark, it’s impossible to change some contracts to use the new benchmark because the new benchmark measures something different and lacks sufficient information to do everything that libor did. Source: i inherited ownership of the system used to submit libor at one of the libor panel banks when i previously worked there.
rr808 5y ago
> When I first heard about LIBOR in 2002, I was surprised that the number is just based on a survey of bankers. Surely there would be accuracy issues with that? Traditionally the banking community of London was super close and built on reputation. People do huge deals based on people's word and people were expected to be honorable. That might sound naieve in the 21st century when global trade is much bigger but it worked for hundreds of years. Secondly LIBOR really was pretty accurate, people talk a lot about how it could have been manipulated but the evidence is isn't so solid. Yes in aggregate a few bps adds up to a lot of money but for individual parties it doesn't really make a difference.
aksss 5y ago
The big secret you learn about central banking pretty early in adulthood is that “we” (society) is still figuring it out, tweaking it, and making it up as we go, and it’s not so old as to have this huge body of proven method that we’re all led to think it does. The systems are brittle, prone to manipulation, and every once in a while we manage to avert a crisis and keep from going completely off the rails. It’s not a bad endeavor, but it’s nowhere near the level of perfection and stability that like to imagine.
jhbadger 5y ago
Apparently a lot of the "university rankings" that you see are based a similar method -- faculty/staff at various universities are asked to rank (other) universities and their results summarized. So, for example Harvard is the #1 US university because many people at other universities think it is! There are other attempts at rankings that try to be more objective (such as number of papers published, number of Nobel Laureates on faculty, etc.) but those of course focus more on the research output of the university rather than teaching.

cromulent 5y ago

The Corruption Index is similar - it’s based on how corrupt people think a nation is. Nothing to do with how much actual corruption exists.

sokoloff 5y ago
It seems overwhelmingly likely that "how corrupt people think a nation is" does have "[something] to do with how much actual corruption exists".
- deleted 5y ago
  [deleted]
- tacostakohashi 5y ago
  Kind of... but certain countries have done a great job of gaming the system, particularly one of the countries that is currently ranked #3.
  - Shorel 5y ago
    Switzerland?
- refurb 5y ago
  Not in the least. Look at crime statistics versus how safe people feel. People say “crime is worse than 20 years ago” when the murder rate is 1/5th. Perception =\= reality.
- lvmz 5y ago
  Just how much corruption is known. Even if you make the assumption that people in aggregate can generally assess whether corruption exists somewhere, it'd be harder to measure the 'severity' that way. I actually think you're probably correct that people's perceptions of corruption have some connection to reality, but I think the more fundamental problem with such a scale is boiling a complicated reality like corruption into a single corruption number, which seems pretty silly on its face.
- Shorel 5y ago
  Technically yes, but on the short term, there is a lot of lag to this signal. Even in the not so short term. That is: people's perception can be anything from a few months to a few decades outdated to the current state. Usually, every four years, a new party in power can change the trend. So, it is overwhelmingly likely that something better can be found to reflect this reality.
- riffraff 5y ago
  Up to a point. A lot of these indexes are PR and the people who answer them have motives to rate one way or the other (e.g. you are an opinionated journalist and you want the current government to look bad). There's usually something weird going on with some of these indexes if you compare statistics with opinion-survey-based stats.

kaesar14 5y ago

This was also my impression learning about it as I was starting to learn about global finance in high school. Even them it seemed ridiculous. I wonder how many more systems currently in place are based on such foolish promises and easily exploited foundations of trust.

boringg 5y ago
Fiat currency is based on trust - so was the gold standard to a degree. Trust is an important part of society. We rip trust away in our societal institutions and we are left in a terrible existence. If you boil everything down - trust a critical function. Your day is filled with trust of functioning. Without it you would live in pure chaos. I find these arguments facile.
cardiffspaceman 5y ago
Pre-SoundScan record sales numbers?
NoboruWataya 5y ago
Trust is central to the financial system, for better or worse. The whole thing is based on trust - whether it's trust in the person on the other end of the phone, trust in the big-name bank that person works for, or trust in that bank's regulator. This seems stupid to some tech people, who try to disrupt it by creating trustless systems such as distributed ledgers. But trust keeps on creeping back into the system. There are crypto custodians, crypto brokers, crypto exchanges, all of whom you have to trust to some extent. There is crypto lending. I wouldn't be surprised if we eventually have the Bitcoin Interexchange Offered Rate decided by a handful of the biggest exchanges.
- FredPret 5y ago
  Or we can call it the Hash-based Ordinary Daily Lending Rate
  - robertlagrant 5y ago
    Yes. You win HN today.

SkyMarshal 5y ago

The more I've learned of the banking system, the more examples of this I see. It seems that much of the banking system was designed by bottom-line-oriented, non-systems-thinkers, who just wanted an immediate, good-enough solution to a problem. Accuracy, reproducibility, scalability, systemic integrity, and similar concerns often weren't a factor.

tlb 5y ago
It evolved from a small system where the people all knew each other and went to the same few public schools where everything also ran on the honor system. It wasn't a bad design for its original scale & context. Those dumb bankers. We computer scientists would never design something that failed to scale through 5 decades.
- deleted 5y ago
  [deleted]
- pgwhalen 5y ago
  I'd suggest that most of society still runs on the honor system (especially finance and law), it's just more abstracted away from interpersonal relationships than it used to be. The existence of things like encryption often deceives us hackers about what the real foundation is.
  - derefr 5y ago
    Every day when I pass through the lobby of my apartment building, I think about the fact that our lettermail gets locked up tight in individually-keyed mailboxes, but — due to our building not being "large enough to qualify" for a parcel dropbox — large high-value parcels instead just get left lying on the lobby floor beside the mailboxes, with the matter of not stealing other people's parcels left entirely up to the honor system. (And yes, this is the same lobby that arbitrary guests will walk through to the elevator if buzzed in by any tenant who hears the word "Amazon" muttered vaguely through their phone.) Of course, the locks of those individually-keyed mailboxes are also probably rakeable or bumpable or some other two-second attack. But at least that deters people who never bothered to look into how locks work.

CraigJPerry 5y ago

>> I was surprised that the number is just based on a survey of bankers The numbers that LIBOR is measuring ultimately represent a human’s opinion. Well, it’s the opinions of several humans then the highest and lowest opinions get discarded and the rest averaged. It’s not measuring a value derived deterministically from some inputs, so how else could you capture it?

DwnVoteHoneyPot 5y ago
It's being replaced by historical market transaction data. Like stocks prices are based on last price.
- CraigJPerry 5y ago
  We’re not producing cola anymore, everyone should use water instead. SONIA is just one rate - last nights GBP overnight rate. LIBOR benchmark currencies have tenors, the future borrowing rates at different maturities. They’re different things - so different that a “synthetic LIBOR” rate is now produced in order to help transition instruments that can’t rely only on the historical overnight rate like SONIA. It’s true that LIBOR is being replaced (although a level 1 submission to ICE LIBOR was already based on value weighted averages from eligible transactions - it’s just that a level 3 expert judgement could override it) - but it’s not being replaced by something comparable. It’s being Replaced by an entirely different benchmark, it’s impossible to change some contracts to use the new benchmark because the new benchmark measures something different and lacks sufficient information to do everything that libor did. Source: i inherited ownership of the system used to submit libor at one of the libor panel banks when i previously worked there.

rr808 5y ago

> When I first heard about LIBOR in 2002, I was surprised that the number is just based on a survey of bankers. Surely there would be accuracy issues with that? Traditionally the banking community of London was super close and built on reputation. People do huge deals based on people's word and people were expected to be honorable. That might sound naieve in the 21st century when global trade is much bigger but it worked for hundreds of years. Secondly LIBOR really was pretty accurate, people talk a lot about how it could have been manipulated but the evidence is isn't so solid. Yes in aggregate a few bps adds up to a lot of money but for individual parties it doesn't really make a difference.

aksss 5y ago

The big secret you learn about central banking pretty early in adulthood is that “we” (society) is still figuring it out, tweaking it, and making it up as we go, and it’s not so old as to have this huge body of proven method that we’re all led to think it does. The systems are brittle, prone to manipulation, and every once in a while we manage to avert a crisis and keep from going completely off the rails. It’s not a bad endeavor, but it’s nowhere near the level of perfection and stability that like to imagine.

jhbadger 5y ago

Apparently a lot of the "university rankings" that you see are based a similar method -- faculty/staff at various universities are asked to rank (other) universities and their results summarized. So, for example Harvard is the #1 US university because many people at other universities think it is! There are other attempts at rankings that try to be more objective (such as number of papers published, number of Nobel Laureates on faculty, etc.) but those of course focus more on the research output of the university rather than teaching.