When the Evaluated Pay their Evaluators…

                The recent financial meltdown revealed large bond ratings agencies, notably Moody’s, Finch and S&P, would rate “toxic bonds” as “prime”. To clarify, certain profit-seeking companies are paid to rate bonds (kinds of investments) as good/ “prime” or bad/ “not prime,” and many ratings agencies, often operating with multi-billion-dollar revenues, consistently overrated bonds. Why? These agencies were paid by the very people who issued the bonds that were rated (aka investment banks and the like). Bond issuers, wanting to make investments attractive, “shopped around” different ratings agencies until an agency was found that rated even bad investments highly. Thus, bond rating agencies found themselves needing to rate bonds more highly to make larger profits (as long as they could get away with it). If unwilling to do so, bond issuers could go to competing ratings agencies, which meant smaller profits for more “honest” bond rating agencies.

                Why is this relevant? I hypothesize that the multitude of willing researchers and CRO’s give pharmaceutical companies the option to “shop around” for those researchers that have a tendency to produce and/ or publish “positive results.” I suspect the ability of pharmaceutical companies, wanting to make their products as attractive as possible, to “shop around” and select particular researchers or CRO’s who tend to publish “positive results” make those researchers more attractive in the “pharmaceutical research job market.” Consequently, just as “honest” ratings agencies were out-competed for profits by agencies willing to “fudge” their ratings, it is plausible that the most “honest” researchers are being out-competed for funding by researchers willing to “fudge” their data.”

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One Response to When the Evaluated Pay their Evaluators…

  1. shitangshuroy says:

    In case folks were interested, you can read about the over-rating of bonds by ratings agencies in Marc Joffe’s recent article in The Guardian, entitled “Moody’s, S&P and other Credit Rating Agencies Deserve a Failing Grade” (found at: http://www.guardian.co.uk/commentisfree/2013/feb/25/moodys-sp-credit-rating-agencies-need-reform). This phenomenon is also widely discussed in in many economics publications. A documentary which I think discusses bond ratings, among other recession-related issues, is CBC’s “Meltdown” (http://www.youtube.com/watch?v=ZWU65Zbka4E; an excellent documentary for those interested in the recent recession). There is also a useful article on “Bond Rating Agencies” from the ever-reliable Wikipedia.

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