Economics of Trust

Trust: money, markets and society

by Geoffrey Hosking

Published by Seagull Books, Calcutta, 2010

TRUST AS AN ORGANIZING PRINCIPLE IN OFFSHORING INTERCULTURAL RELATIONSHIPS

by Alya Mlaiki

Failure at the Lower Levels

by Martin Engel

This case study analyzes the reasons for failures by Credit Suisse banking advisors prior to the recent financial... more This case study analyzes the reasons for failures by Credit Suisse banking advisors prior to the recent financial crisis and attempts to develop a strategy for international law that will dis-incentivize advisors from failing, thereby averting consumer losses in the future.

The paper does not focus on failures at the level of dealers in the financial markets but on potential malpractice of banking advisors who recommend hazardous investments and who might be held responsible for overoptimistic valuation of credit collateral. The case of Credit Suisse is widely recognized as an example of systematic, quasi-fraudulent advisory service that led to severe losses for low-income clients and precipitated an unprecedented consumer trust crisis. A crucial goal of this analysis is to discover the incentives that motivated the banking advisors to engage in this activity and to describe potential, internationally appropriate, legal means to overcome this trust crisis.

The study concludes that banks will need to fundamentally change the incentives of their advisors to achieve high advisory quality and regain their clients’ trust. These changes will most notably comprise financial (counter-) incentives such as the abolition of commissions, a new structure of profit-related salaries, and penalties for nontransparent advisory behavior. Parallel to the need for action within the banks, is government responsibility to legally coerce banks into setting so-modified incentives. By these means, cases such as the one of Credit Suisse will be prevented. Furthermore, these measures can help to mitigate future trust crises and thereby add to the stability of banking business.

The Socio-cognitive Dynamics of Trust: Does Trust Creates Trust?

by Cristiano Castelfranchi

Authors: Rino Falcone & Cristiano Castelfranchi

If it is true that trust is always more recognized as a main topic for the new technological scenarios in which humans... more If it is true that trust is always more recognized as a main topic for the new technological scenarios in which humans and artificial entities collaborate with each other, it is also true that a real understanding of all trust features is not again realized.
In particular, in this paper we try to cope with an interesting characteristic of trust that is its dynamics. We will examine two main aspects of trust dynamics:
a) How A’s trusting B and relying on it in situation Ω can actually (objectively) influence B’s trustworthiness within Ω. Either trust is a self-fulfilling prophecy that modifies the probability of the predicted event; or it is a self-defeating strategy by negatively influencing the events.  And also how A can be aware of and take into account the effect of its own decision in the very moment of that decision.
b)  How trust creates a reciprocal trust, and distrust elicits distrust; but also vice versa: how A’s trust in B could induce lack of trust or distrust in B towards A, while A’s diffidence can make B more trustful in A.  And also how A can be aware of and take into account this effect of its own decision in the very moment of that decision.
Those phenomena are very crucial in human societies (market, groups, states), however we claim that they are also very fundamental in computer mediated organizations, interactions (like Electronic Commerce), cooperation (Computer Supported Cooperative Work), etc. and even in Multi-Agent Systems with autonomous agents.

Laxenburg TECT: Reflections on a literature that GIScientists and Historians do not know

by J. B. (Jack) Owens

Report for the DynCoopNet Project, TECT (The Evolution of Cooperation and Trading), EUROCORES Scheme, European Science Foundation

Report on the TECT Conference at the International Institute of Applied Systems Analysis (IIASA), Laxenburg, Austria,... more Report on the TECT Conference at the International Institute of Applied Systems Analysis (IIASA), Laxenburg, Austria, 15-18 September 2009. Conference title: “Evolution of Cooperation: Models and Theories”; prepared especially for the nineteen core researchers of the TECT project “Dynamic complexity of self-organizing, cooperation-based commercial networks in the first global age”, who were excluded from participation by the collapse of TECT networking funds. The DynCoopNet Project within TECT focuses on cooperation within the networks linking the global domains of Iberian Monarchies during the First Global Age, 1400-1800.

Trust and Reciprocity: Misunderstandings

by Cristiano Castelfranchi

We contest a reductive view of trust, quite diffused in economics, and in studies influenced by the Game-Theoretic... more We contest a reductive view of trust, quite diffused in economics, and in studies influenced by the Game-Theoretic framework: the idea that trust has necessarily to do with contexts requiring 'reciprocation'; or that trust is trust in the other's reciprocation. A multi-layered cognitive model of trust will be proposed. Trust is not conceived only as an attitude towards the other, implying different kinds of beliefs (evaluations, expectations, beliefs on the other's motives, etc.), but also as a willingness to rely on the others that makes us dependent and vulnerable from them, as well as a concrete act of reliance based on this. Not necessarily we trust people because they will be willing to reciprocate; and we do not necessarily reciprocate for reciprocating. Trust (even ‘genuine’ trust) is based on a variety of motivations ascribed to others and making prevail the adoption of our needs and goals: from ‘altruism’ to ‘self-interest’, from reciprocation to norms or to affective reasons.


Keywords
Trust, Reciprocity, Cognitive theory, Goal-Adoption

An Experimental Investigation of Revealed Environmental Concern

by Natalia V. Czap

Poster was presented at BDRM-2010 Pittsburgh, PA

Czap, N.V., Czap, H.J., 2010. An experimental investigation of revealed environmental concern. Ecological Economics,... more Czap, N.V., Czap, H.J., 2010. An experimental investigation of revealed environmental concern. Ecological Economics, 69(10): 2033-2041.

This paper explores the determinants of revealed environmental concern. Specifically, the model proposed in this paper examines the connection between the willingness to sacrifice monetary well-being to support the environment and stated environmental concern, psychological predispositions, socio-economic and demographic characteristics, and pecuniary incentives. Empirical tests show that certain facets of stated environmental concern (such as New Environmental Paradigm, environmental-economic tradeoff, and participation in outdoor activities), psychological traits of trust and empathy, socio-demographic characteristics of gender and residence, as well as pecuniary incentives, including monetary benefits and opportunity costs, are good predictors of actual behavior in the revealed environmental concern experiment. The results support general external validity of environmental concern constructs. They also add to the discussion of what psychological factors drive individuals' actions benefiting the environment, which is of particular interest to environmental agencies and organizations. In addition, we find evidence of a common understanding of how much ought to be donated, as donations are less sensitive to external factors compared to actions based on monetary incentives. The results also demonstrate that an increase in the opportunity costs of donations leads to a very modest decrease in donations, which is good news for environmental agencies.

A Formal Model of Trust Based on Outcomes

by Timothy Devinney

The Academy of Management Review, Vol. 23, No. 3, pp. 459-472, Jul., 1998.

The study of trust has occupied scholars from a number of disciplines, who have made limited attempts at integrating... more The study of trust has occupied scholars from a number of disciplines, who have made limited attempts at integrating the different streams. One reason for lack of integration is that no clear definition of trust exists. In this article we grapple with this issue by going back to first principles to derive a mathematically precise and statistically rigorous definition of trust. In giving a rigorous meaning of trust, we also capture the key elements of the concept as highlighted by various disciplinary lenses. Our definition of trust, although rationally based, is consistent with many of the findings of earlier behavioral and sociological research. Its contribution is in adding precision and richness to our understanding of how trust is created and maintained in various social and economic interactions.

“I don't want to be selling my soul”: two experiments in environmental economics.

by Natalia V. Czap

Written under the maiden name Ovchinnikova

Ovchinnikova, N., H. Czap, G. Lynne, C. Larimer, 2009. “I don't want to be selling my soul”: two experiments in... more Ovchinnikova, N., H. Czap, G. Lynne, C. Larimer, 2009. “I don't want to be selling my soul”: two experiments in environmental economics. Journal of Socio Economics, 38(2): 221-229.

We conducted two experiments in the context of environmental protection. We found that profit considerations and personality traits are among the essential determinants of individual contributions to the solution of environmental problems. The results show that environmental considerations are powerful motivators and subjects are willing to forgo pecuniary profits for the sake of “doing-the-right-thing”. The study shows that the environmental groups can purchase carbon offsets directly from the providers at a lower-than market price and still obtain a relatively large market share.

Walk the Talk? The Effect of Voting and Excludability in Public Goods Experiments.

by Natalia V. Czap

Czap, H.J., Czap, N.V, Bonakdarian, E. 2010. Walk the Talk? The Effect of Voting and Excludability in Public Goods... more Czap, H.J., Czap, N.V, Bonakdarian, E. 2010. Walk the Talk? The Effect of Voting and Excludability in Public Goods Experiments. Economics Research International
Volume 2010, Article ID 768546, 15 pages
doi:10.1155/2010/768546

The purpose of this paper is to investigate the effect of voting and excludability on individual contributions to group projects. We conducted two experiments on excludable and nonexcludable public goods, which provided several important results. First, contrary to our expectations, subjects are generally contributing more to the non-excludable compared to the excludable public good. Second, participating in a vote to choose a public project per se makes no difference in contributions. However, if the project that the individual voted for also gets selected by the group, they contribute significantly more to that project. Third, empathy and locus of control are important driving forces of participation in common projects. Our results have implications on the procedural design of obtaining funding for public projects. First, the public should get involved and have a say in the determination of which project should be realized. Second, it might well pay off to attempt to develop a consensus among the population and obtain near unanimous votes, because in our experiment, subjects discriminate between the project they voted for and the project chosen by the majority. Third, the policy proposers should stress the other-regarding interest of the public good rather than just pecuniary incentives.