Social Capital, Trust and FICO Scores

Written by: Bill Sherman on Monday, 1 September 2008, 6:00 AM

Francis Fukuyama, professor at Johns Hopkins, has defined social capital as “instantiated informal norm that promotes cooperation between two or more individuals.” These norms are cultural behaviors embedded that include concepts such as:

• Honesty
• The keeping of commitments
• Reliable performance of duties
• Reciprocity

Fukuyama looks at how these norms impact societies (a macro-level of nationhood). However, it’s also possible to look at individual within a network through the same lens.

If we start with Fukuyama’s approach to social capital, then we can gain a new appreciation for credit reporting agencies–such as Equifax, TransUnion, Experian, and Fair Isaac. Traditionally, credit histories measure your past behavior in order to predict two things: your willingness to repay future debts and your ability to make on-time payments. A lender who gives you money wants to know if they can trust you to do what you promise.

Credit ratings measure trust within a social network. Lender X trusts you because you’ve shown trustworthy behavior to Lender A, Lender B, and Lender C. You pay your bills on-time, and you honor your commitments.

While the sub-prime mortgage mess perhaps represents predictive financial modeling getting “too clever for its own good,” there’s a lesson here that we can extrapolate to individual relationships.

When you make a commitment you invest part of your reputation. If you live up to expectations, you will strengthen a bond; however, if you miss a deadline or under-perform, you will weaken a bond.

In the world of finance, people with higher credit scores are able to get loans–often at a much-lower interest rate than people who have low credit scores.

If you tie that to Nan Lin’s concept of social capital (“the ability to locate and mobilize resources within your network”) it creates a pretty elegant theory. If you have a strong social capital credit-rating within your social network, you will be able to more easily locate and mobilize resources within your network. If your credit-rating is weak, you will struggle to locate resources and obtain help.

Once you’re embedded within a social network, people will quickly know if you live up to your commitments. That’s your social capital credit score.

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