May 19, 2009

Chicago professor tracks trust in markets with new index

A new metric for measuring consumer confidence in the economy designed by Booth School of Business professor Luigi Zingales will track the relationship of Americans’ trust in institutions and the strength of the economy.

The survey, called the Chicago Booth/Kellogg School Financial Trust Index, is an outgrowth of a collaboration between Zingales and Northwestern Kellogg School of Management professor Paola Sapienza. Given to approximately 1,000 American households each financial quarter, it provides an estimate of consumers’ opinions on the financial industry and their trust in the stock market, banks, corporations, and in current government interventions, while most other indices focus on consumer confidence.

According to the index’s creators, people view trust as a more stable, long-term feeling than confidence, which is constantly fluctuating. However, Zingales said the index was partially created to test that assumption.

Thus far, the index has been published twice, creating a short but intriguing log of consumer confidence across financial quarters, Zingales said. The December 2008 survey, for example, found that 80 percent of respondents expressed lowered levels of confidence in the stock market as a result of government interventions in the economy, but that number has dropped down to 67 percent.

Zingales and Sapienza have found that without trust in the financial system—an expectation that financial institutions are acting to benefit, or at least not harm others—Americans are less willing to invest their money. By studying trust, Zingales and Sapienza can track Americans’ beliefs in the strength of the economy. “In the middle of the financial crisis, we would have regretted not having an index over time,” Zingales said.

Over the past three years, Zingales and Sapienza have worked together on a variety of research on the relationship between trust and the strength of economies. Currently, the two professors are looking into why people “walk away from their houses when the value of the mortgage is larger than the value of the house,” Zingales said.

A new set of results from the Financial Trust Index should be available shortly after the end of the next financial quarter, June 30.