Trusting and non-trusting on the internet

Boston University Law Review

Volumn 81, Issue 2, 2001, Pages 457-476

  Frankel, Tamar ^a  

^a NONE

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EID: 0035609596     PISSN: 00068047     EISSN: None     Source Type: Journal    
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References (90)

1. See Rajeev Bhattacharya et al., A Formal Model of Trust Based on Outcomes, in 23 THE ACADEMY OF MANAGEMENT REVIEW, SPECIAL FORUM ON TRUST IN AND BETWEEN ORGANIZATIONS, 460 (Sim B. Sitkin et al. eds., 1998) (showing that the main vieew of trusting is a relationship among individuals and groups and rejecting the view that trust is merely an individual trait). Trust is defined as expected behavior of the other party and readiness to risk disappointment. The issue of trusting can be raised only in the context of interaction with others. See id.
2. See Rajeev Bhattacharya et al., A Formal Model of Trust Based on Outcomes, in 23 THE ACADEMY OF MANAGEMENT REVIEW, SPECIAL FORUM ON TRUST IN AND BETWEEN ORGANIZATIONS, 460 (Sim B. Sitkin et al. eds., 1998) (showing that the main vieew of trusting is a relationship among individuals and groups and rejecting the view that trust is merely an individual trait). Trust is defined as expected behavior of the other party and readiness to risk disappointment. The issue of trusting can be raised only in the context of interaction with others. See id.
3. Some authors add an emotional bond or moral internal drive as a bridge from evidence to belief. See TRUDY GOVIER, SOCIAL TRUST AND HUMAN COMMUNITIES 24 (1997) ("Cognitively . . . trust is based on a chosen 'leap' from considered evidence to belief beyond what that evidence would warrant;" that leap is based on an emotional bond among the actors). These elements have merit, but I omit them to simplify the analysis. Further, scholars have defined the risk of trusting as asymmetrical information among the parties, though I decline to add this factor. No two parties have symmetrical information; therefore, risk exists in any human relationship. The risk of trusting relates to the cost of obtaining the relevant information and the degree of assurance that the information is true.
4. There are numerous definitions of trust. For a survey and proposed definition by outcome, see Bhattacharya, supra note 1, at 460 (listing dictionary definitions of trust and distinguishing among cognitive, emotional and behavioral components of trust). Webster's Dictionary defines trust as the "firm belief or confidence in the honesty, integrity, reliability, justice, etc. of another person or thing." WEBSTER'S NEW WORLD DICTIONARY OF AMERICAN ENGLISH 1436 (3d ed. 1994).
5. See GOVIER, supra note 2, at 153 (discussing social trust as social capital, a resource which emerges with experience); see also Ann Marie Zak et al., Assessments of Trust in Intimate Relationships and Self-Perception Process, 138 (2) J. SOC. PSYCHOL. 217, 225 (1998) (finding that the trusting behavior of the participants in the experiments are often self fulfilling and explaining that blind trust is usually a product of one's self perception). Trustworthy people are more likely to blindly trust others. See id.
6. See GOVIER, supra note 2, at 153 (discussing social trust as social capital, a resource which emerges with experience); see also Ann Marie Zak et al., Assessments of Trust in Intimate Relationships and Self-Perception Process, 138 (2) J. SOC. PSYCHOL. 217, 225 (1998) (finding that the trusting behavior of the participants in the experiments are often self fulfilling and explaining that blind trust is usually a product of one's self perception). Trustworthy people are more likely to blindly trust others. See id.
7. See GOVIER, supra note 2, at 153 (discussing social trust as social capital, a resource which emerges with experience); see also Ann Marie Zak et al., Assessments of Trust in Intimate Relationships and Self-Perception Process, 138 (2) J. SOC. PSYCHOL. 217, 225 (1998) (finding that the trusting behavior of the participants in the experiments are often self fulfilling and explaining that blind trust is usually a product of one's self perception). Trustworthy people are more likely to blindly trust others. See id.
8. Trusting does not mean believing all unverified representations; rather it means believing unverified representations when it is not unreasonable to do so. "[B]elieving when most people of the same social group would consider belief naive and foolish" qualifies as gullibility. See Julian B. Rotter, Interpersonal Trust, Trustworthiness, and Gullibility, 35 AM. PSYCHOL. 1, 4 (1980).
9. Gullibility is an unreasonable belief, as the famous story of the sale of the Brooklyn Bridge demonstrates. Hope involves a strong component of wishing for a future event. A wise person may observe that "a second marriage is a triumph of hope over experience." Notwithstanding experience, the second marriage reflects the parties' hope that, with different spouses and maturity, the second marriage will work. In faith, the quantum of direct evidence is not as relevant to the believer. But see GOVIER, supra note 2, at 14 (criticizing the distinction between faith as "an undoubting, unconditional belief in which data for proof and refutation is ignored" and trust as undoubting belief that does not ignore pertinent proof).
10. See GOVIER, supra note 2, at 230 (citing SISSELA BOK, A STRATEGY FOR PEACE (1989)). "Do it yourself" verification may be less costly and more reliable than verification by others. But that is not always true. Cost depends on the "doer's" time value and lost opportunities, as compared to the compensation of experts and agency costs of delegation. For example, the decision would be made depending on which of the following costs exceed the others: the cost of "do it yourself" [X (acquiring expertise) + Y (lost opportunities)] or the cost of delegating verification to others [A (compensation to the delegate) + B (agency costs)]. Thus, one's own judgment may be decisive because one bears the consequences of the decision, but one's level of wisdom, knowledge and expertise, may be lower. Though people ask for the opinions of others, they ultimately make up their own minds.
11. See GOVIER, supra note 2, at 27 (asserting that trust is a reflexive phenomenon; to be trusted requires having trust).
12. See id. at 87-88 (attempt of teachers in a Canadian law school to control students through minutely detailed rules of examinations led to a culture of mistrust; the attitude of mistrust bred more mistrust).
13. See JOHN O. WHITNEY, THE ECONOMICS OF TRUST LIBERATING PROFITS AND RESTORING CORPORATE VITALITY (1996) (creating trusting within the organization and with outside parties is profitable as well as good); RODERICK M. KRAMER AND TOM R. TYLER, TRUST IN ORGANIZATIONS, FRONTIERS OF THEORY AND RESEARCH 232 (1996) (showing the many ways in which trust is important to organizational life including business organizations; noting that trust is based in reciprocity and is tied to one's expectations).
14. See JOHN O. WHITNEY, THE ECONOMICS OF TRUST LIBERATING PROFITS AND RESTORING CORPORATE VITALITY (1996) (creating trusting within the organization and with outside parties is profitable as well as good); RODERICK M. KRAMER AND TOM R. TYLER, TRUST IN ORGANIZATIONS, FRONTIERS OF THEORY AND RESEARCH 232 (1996) (showing the many ways in which trust is important to organizational life including business organizations; noting that trust is based in reciprocity and is tied to one's expectations).
15. Some cultures focus on the identity of counter parties. They decline to do business with foreigners, members outside the family group, or another race, or strangers unless introduced by reliable friends. The quantum and sources of evidence form the measures of reasonableness of belief on which trusting is based. One can reasonably believe statements made by a trusted person, similar to indirect evidence. One can reasonably believe in the reliability of promises by trusting the promisor on the basis of the promisor's character, reputation, and past performance. Independent verification, such as proof by documents or independent parties, (e.g., accountants, lawyers, independent witnesses, or experts, or guarantors) may support the trustworthiness of the trusted party.
16. Associated Press, Historic Missile Treaty Signed; Leaders Pledge Further Efforts for Arms Control, L.A. TIMES, Dec. 8, 1987, at A1.
17. This analysis is similar to Coase's Theory of the Firm. A firm can be viewed as an organizational form that enhances trusting, thereby reducing costs of interaction. If contracts were adequate, the firm would not be necessary. This argument was suggested by Professor Michael Meurer.
18. See RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 284 (5th ed. 1998) ("Honesty, trustworthiness, and love reduce the costs of transactions."). There is also the psychological benefit of simplified complex information. Social trusting, that is trusting by a large group governed by similar trusting norms, can also enhance economic prosperity.
19. See Juliet P. Kostritsky, Bargaining With Uncertainty, Moral Hazard, and Sunk Costs: A Default Rule For Precontractual Negotiations, 44 HASTINGS L.J. 621, 643 (1993) (noting that trust may substitute for legal formalities, such as contracts, in on-going relationships); Michael Meyer, Here's a "Virtual' Model for America's Industrial Giants, NEWSWEEK, Aug. 1993, at 40 (describing Kingston Technology Corporation and its lack of formal dealing). "Trust cements the network. It is the essence of our relationships . . . . The deals were closed on a handshake, Kingston style." Id. (internal quotation marks omitted).
20. See Juliet P. Kostritsky, Bargaining With Uncertainty, Moral Hazard, and Sunk Costs: A Default Rule For Precontractual Negotiations, 44 HASTINGS L.J. 621, 643 (1993) (noting that trust may substitute for legal formalities, such as contracts, in on-going relationships); Michael Meyer, Here's a "Virtual' Model for America's Industrial Giants, NEWSWEEK, Aug. 1993, at 40 (describing Kingston Technology Corporation and its lack of formal dealing). "Trust cements the network. It is the essence of our relationships . . . . The deals were closed on a handshake, Kingston style." Id. (internal quotation marks omitted).
21. See Juliet P. Kostritsky, Bargaining With Uncertainty, Moral Hazard, and Sunk Costs: A Default Rule For Precontractual Negotiations, 44 HASTINGS L.J. 621, 643 (1993) (noting that trust may substitute for legal formalities, such as contracts, in on-going relationships); Michael Meyer, Here's a "Virtual' Model for America's Industrial Giants, NEWSWEEK, Aug. 1993, at 40 (describing Kingston Technology Corporation and its lack of formal dealing). "Trust cements the network. It is the essence of our relationships . . . . The deals were closed on a handshake, Kingston style." Id. (internal quotation marks omitted).
22. See ROBERT COOTER & THOMAS ULEN, LAW AND ECONOMICS 93 n.3 (2000) (describing the Prisoner's Dilemma as a non-cooperative game). In this game, two suspects are kept incommunicado in different prison cells, and offered the following: if one confesses and the other does not, the confessor received half a year in prison and the non-confessor ten years. If both confess, each receives 5 years. If neither confesses, each receives one year. Their best bet is not to confess, but that depends on whether the other will. See id. Most terms of the bargain remain implicit anyway, regardless of how detailed contracts are. It is often more efficient to deal with another party that tends to reach working solutions and shares a similar sense of fairness than with a party that "goes by the (contract) book." In a trust relationship, the parties know approximately what each can be expected to do in the case of misunderstanding, and are willing to take the risk that the result will not be satisfactory. That risk taking is not only reasonable but is likely to be cost-saving.
23. See ROBERT COOTER & THOMAS ULEN, LAW AND ECONOMICS 93 n.3 (2000) (describing the Prisoner's Dilemma as a non-cooperative game). In this game, two suspects are kept incommunicado in different prison cells, and offered the following: if one confesses and the other does not, the confessor received half a year in prison and the non-confessor ten years. If both confess, each receives 5 years. If neither confesses, each receives one year. Their best bet is not to confess, but that depends on whether the other will. See id. Most terms of the bargain remain implicit anyway, regardless of how detailed contracts are. It is often more efficient to deal with another party that tends to reach working solutions and shares a similar sense of fairness than with a party that "goes by the (contract) book." In a trust relationship, the parties know approximately what each can be expected to do in the case of misunderstanding, and are willing to take the risk that the result will not be satisfactory. That risk taking is not only reasonable but is likely to be cost-saving.
24. See GOVIER, supra note 2, at 11 (The Prisoner's Dilemma "serves to indicate the self-defeating character of the single-minded and solitary pursuit of one's own self-interest."). Another benefit from trusting is demonstrated in the workplace. Recently, American businesses have worked hard to create trusting and cooperation among their employees, and between employees and management. Far more discretion has been vested in employees. A similar pattern of limited cooperation among competing business organizations is also developing. See WHITNEY, supra note 10, at 191 (arguing that creating a trusting environment within the organization and outside is both profitable and good). See Special Forum on Trust in and Between Organizations, 23 THE ACADEMY OF MANAGEMENT REVIEW 459 (Sim B. Sitkin et al. eds., 1998) (containing papers on trusting building and its benefits in business organizations and defining trust using mathematical models); see also Bruce Chapman, Trust, Economic Rationality, and the Corporate Fiduciary Obligation, 43 U. TORONTO L.J. 547 (1993) (arguing against the concept of a corporation as a contract and emphasizing the role of trust and loyalty in the corporate organization); Giancarlo Spangnolo, Social Relationships and Cooperation in Organizations, 38 J. ECONOMIC BEHAVIOR & ORGANIZATION 1 (1999) (addressing "the effects of social relationships on cooperation (or collusion) in organizations (or communities)" and arguing that the employment of members of the same community facilitates cooperation in production and increases social capital because "the linkage generates transfers of 'trust'").
25. See GOVIER, supra note 2, at 11 (The Prisoner's Dilemma "serves to indicate the self-defeating character of the single-minded and solitary pursuit of one's own self-interest."). Another benefit from trusting is demonstrated in the workplace. Recently, American businesses have worked hard to create trusting and cooperation among their employees, and between employees and management. Far more discretion has been vested in employees. A similar pattern of limited cooperation among competing business organizations is also developing. See WHITNEY, supra note 10, at 191 (arguing that creating a trusting environment within the organization and outside is both profitable and good). See Special Forum on Trust in and Between Organizations, 23 THE ACADEMY OF MANAGEMENT REVIEW 459 (Sim B. Sitkin et al. eds., 1998) (containing papers on trusting building and its benefits in business organizations and defining trust using mathematical models); see also Bruce Chapman, Trust, Economic Rationality, and the Corporate Fiduciary Obligation, 43 U. TORONTO L.J. 547 (1993) (arguing against the concept of a corporation as a contract and emphasizing the role of trust and loyalty in the corporate organization); Giancarlo Spangnolo, Social Relationships and Cooperation in Organizations, 38 J. ECONOMIC BEHAVIOR & ORGANIZATION 1 (1999) (addressing "the effects of social relationships on cooperation (or collusion) in organizations (or communities)" and arguing that the employment of members of the same community facilitates cooperation in production and increases social capital because "the linkage generates transfers of 'trust'").
26. See GOVIER, supra note 2, at 11 (The Prisoner's Dilemma "serves to indicate the self-defeating character of the single-minded and solitary pursuit of one's own self-interest."). Another benefit from trusting is demonstrated in the workplace. Recently, American businesses have worked hard to create trusting and cooperation among their employees, and between employees and management. Far more discretion has been vested in employees. A similar pattern of limited cooperation among competing business organizations is also developing. See WHITNEY, supra note 10, at 191 (arguing that creating a trusting environment within the organization and outside is both profitable and good). See Special Forum on Trust in and Between Organizations, 23 THE ACADEMY OF MANAGEMENT REVIEW 459 (Sim B. Sitkin et al. eds., 1998) (containing papers on trusting building and its benefits in business organizations and defining trust using mathematical models); see also Bruce Chapman, Trust, Economic Rationality, and the Corporate Fiduciary Obligation, 43 U. TORONTO L.J. 547 (1993) (arguing against the concept of a corporation as a contract and emphasizing the role of trust and loyalty in the corporate organization); Giancarlo Spangnolo, Social Relationships and Cooperation in Organizations, 38 J. ECONOMIC BEHAVIOR & ORGANIZATION 1 (1999) (addressing "the effects of social relationships on cooperation (or collusion) in organizations (or communities)" and arguing that the employment of members of the same community facilitates cooperation in production and increases social capital because "the linkage generates transfers of 'trust'").
27. See GOVIER, supra note 2, at 11 (The Prisoner's Dilemma "serves to indicate the self-defeating character of the single-minded and solitary pursuit of one's own self-interest."). Another benefit from trusting is demonstrated in the workplace. Recently, American businesses have worked hard to create trusting and cooperation among their employees, and between employees and management. Far more discretion has been vested in employees. A similar pattern of limited cooperation among competing business organizations is also developing. See WHITNEY, supra note 10, at 191 (arguing that creating a trusting environment within the organization and outside is both profitable and good). See Special Forum on Trust in and Between Organizations, 23 THE ACADEMY OF MANAGEMENT REVIEW 459 (Sim B. Sitkin et al. eds., 1998) (containing papers on trusting building and its benefits in business organizations and defining trust using mathematical models); see also Bruce Chapman, Trust, Economic Rationality, and the Corporate Fiduciary Obligation, 43 U. TORONTO L.J. 547 (1993) (arguing against the concept of a corporation as a contract and emphasizing the role of trust and loyalty in the corporate organization); Giancarlo Spangnolo, Social Relationships and Cooperation in Organizations, 38 J. ECONOMIC BEHAVIOR & ORGANIZATION 1 (1999) (addressing "the effects of social relationships on cooperation (or collusion) in organizations (or communities)" and arguing that the employment of members of the same community facilitates cooperation in production and increases social capital because "the linkage generates transfers of 'trust'").
28. See GOVIER, supra note 2, at 11 (The Prisoner's Dilemma "serves to indicate the self-defeating character of the single-minded and solitary pursuit of one's own self-interest."). Another benefit from trusting is demonstrated in the workplace. Recently, American businesses have worked hard to create trusting and cooperation among their employees, and between employees and management. Far more discretion has been vested in employees. A similar pattern of limited cooperation among competing business organizations is also developing. See WHITNEY, supra note 10, at 191 (arguing that creating a trusting environment within the organization and outside is both profitable and good). See Special Forum on Trust in and Between Organizations, 23 THE ACADEMY OF MANAGEMENT REVIEW 459 (Sim B. Sitkin et al. eds., 1998) (containing papers on trusting building and its benefits in business organizations and defining trust using mathematical models); see also Bruce Chapman, Trust, Economic Rationality, and the Corporate Fiduciary Obligation, 43 U. TORONTO L.J. 547 (1993) (arguing against the concept of a corporation as a contract and emphasizing the role of trust and loyalty in the corporate organization); Giancarlo Spangnolo, Social Relationships and Cooperation in Organizations, 38 J. ECONOMIC BEHAVIOR & ORGANIZATION 1 (1999) (addressing "the effects of social relationships on cooperation (or collusion) in organizations (or communities)" and arguing that the employment of members of the same community facilitates cooperation in production and increases social capital because "the linkage generates transfers of 'trust'").
29. See GOVIER, supra note 2, at 153 ("For politics, economics, and personal well-being, social trust is a valuable resource."). Social capital is defined as a moral resource and a public good that is self-perpetuating and lubricates the growth of trust in society. See id. Lack of trust is costly in psychological terms. The unknown is risky; it breeds fear and anxiety, which can be debilitating. See NIKLAS LUHMANN, TRUST AND POWER 4 (1980). quoted in BERNARD BARBER, THE LOGIC AND LIMITS OF TRUST, 10 (1983) ("But a complete absence of trust would prevent him even from getting up in the morning. He would be prey to a vague sense of dread, to paralyzing fears. He would not even be capable of formulating distrust and making that a basis for precautionary measures, since this would presuppose trust in other directions. Anything and everything would be possible. Such abrupt confrontation with the complexity of the world at its most extreme is beyond human endurance."); see also Lawrence E. Mitchell, Fairness and Trust in Corporate Law, 43 DUKE L.J. 425, 432-33 (1993) (noting that the destruction of trust would be the "destruction of the possibility of social relations").
30. See GOVIER, supra note 2, at 153 ("For politics, economics, and personal well-being, social trust is a valuable resource."). Social capital is defined as a moral resource and a public good that is self-perpetuating and lubricates the growth of trust in society. See id. Lack of trust is costly in psychological terms. The unknown is risky; it breeds fear and anxiety, which can be debilitating. See NIKLAS LUHMANN, TRUST AND POWER 4 (1980). quoted in BERNARD BARBER, THE LOGIC AND LIMITS OF TRUST, 10 (1983) ("But a complete absence of trust would prevent him even from getting up in the morning. He would be prey to a vague sense of dread, to paralyzing fears. He would not even be capable of formulating distrust and making that a basis for precautionary measures, since this would presuppose trust in other directions. Anything and everything would be possible. Such abrupt confrontation with the complexity of the world at its most extreme is beyond human endurance."); see also Lawrence E. Mitchell, Fairness and Trust in Corporate Law, 43 DUKE L.J. 425, 432-33 (1993) (noting that the destruction of trust would be the "destruction of the possibility of social relations").
31. See GOVIER, supra note 2, at 153 ("For politics, economics, and personal well-being, social trust is a valuable resource."). Social capital is defined as a moral resource and a public good that is self-perpetuating and lubricates the growth of trust in society. See id. Lack of trust is costly in psychological terms. The unknown is risky; it breeds fear and anxiety, which can be debilitating. See NIKLAS LUHMANN, TRUST AND POWER 4 (1980). quoted in BERNARD BARBER, THE LOGIC AND LIMITS OF TRUST, 10 (1983) ("But a complete absence of trust would prevent him even from getting up in the morning. He would be prey to a vague sense of dread, to paralyzing fears. He would not even be capable of formulating distrust and making that a basis for precautionary measures, since this would presuppose trust in other directions. Anything and everything would be possible. Such abrupt confrontation with the complexity of the world at its most extreme is beyond human endurance."); see also Lawrence E. Mitchell, Fairness and Trust in Corporate Law, 43 DUKE L.J. 425, 432-33 (1993) (noting that the destruction of trust would be the "destruction of the possibility of social relations").
32. See GOVIER, supra note 2, at 153 ("For politics, economics, and personal well-being, social trust is a valuable resource."). Social capital is defined as a moral resource and a public good that is self-perpetuating and lubricates the growth of trust in society. See id. Lack of trust is costly in psychological terms. The unknown is risky; it breeds fear and anxiety, which can be debilitating. See NIKLAS LUHMANN, TRUST AND POWER 4 (1980). quoted in BERNARD BARBER, THE LOGIC AND LIMITS OF TRUST, 10 (1983) ("But a complete absence of trust would prevent him even from getting up in the morning. He would be prey to a vague sense of dread, to paralyzing fears. He would not even be capable of formulating distrust and making that a basis for precautionary measures, since this would presuppose trust in other directions. Anything and everything would be possible. Such abrupt confrontation with the complexity of the world at its most extreme is beyond human endurance."); see also Lawrence E. Mitchell, Fairness and Trust in Corporate Law, 43 DUKE L.J. 425, 432-33 (1993) (noting that the destruction of trust would be the "destruction of the possibility of social relations").
33. See GOVIER, supra note 2, at 153 ("For politics, economics, and personal well-being, social trust is a valuable resource."). Social capital is defined as a moral resource and a public good that is self-perpetuating and lubricates the growth of trust in society. See id. Lack of trust is costly in psychological terms. The unknown is risky; it breeds fear and anxiety, which can be debilitating. See NIKLAS LUHMANN, TRUST AND POWER 4 (1980). quoted in BERNARD BARBER, THE LOGIC AND LIMITS OF TRUST, 10 (1983) ("But a complete absence of trust would prevent him even from getting up in the morning. He would be prey to a vague sense of dread, to paralyzing fears. He would not even be capable of formulating distrust and making that a basis for precautionary measures, since this would presuppose trust in other directions. Anything and everything would be possible. Such abrupt confrontation with the complexity of the world at its most extreme is beyond human endurance."); see also Lawrence E. Mitchell, Fairness and Trust in Corporate Law, 43 DUKE L.J. 425, 432-33 (1993) (noting that the destruction of trust would be the "destruction of the possibility of social relations").
34. See GOVIER, supra note 2. at 26 (noting the element of vulnerability required to trust in matters with which we are unfamiliar). In complex societies we need to trust many people, including experts on information that we do not understand, even if it were disclosed to us. See id.; Tamar Frankel, Fiduciary Law, 71 CAL. L. REV. 795, 803-04 (1983) (discussing specialization and its relation to fiduciary law; specialization is the most efficient way to utilize knowledge).
35. See GOVIER, supra note 2. at 26 (noting the element of vulnerability required to trust in matters with which we are unfamiliar). In complex societies we need to trust many people, including experts on information that we do not understand, even if it were disclosed to us. See id.; Tamar Frankel, Fiduciary Law, 71 CAL. L. REV. 795, 803-04 (1983) (discussing specialization and its relation to fiduciary law; specialization is the most efficient way to utilize knowledge).
36. See GOVIER, supra note 2. at 26 (noting the element of vulnerability required to trust in matters with which we are unfamiliar). In complex societies we need to trust many people, including experts on information that we do not understand, even if it were disclosed to us. See id.; Tamar Frankel, Fiduciary Law, 71 CAL. L. REV. 795, 803-04 (1983) (discussing specialization and its relation to fiduciary law; specialization is the most efficient way to utilize knowledge).
37. Nature's world is no different; sharks are one of the few exceptions. See Behavior (visited May 24, 1999) 〈http://www.seaworld.org/sharks/behavior.html〉 (noting that sharks are basically asocial).
38. See FRANCIS FUKUYAMA, TRUST; THE SOCIAL VIRTUES AND THE CREATION OF PROSPERITY 7 (1995) (noting that a nation's ability to compete is conditioned by the level of trust inherent in the society); FRANCIS FUKUYAMA, GREAT DISRUPTION: HUMAN NATURE AND THE RECONSTITUTION OF SOCIAL ORDER 256 (1999) (defining attributes such as honesty and fairness as social capital, produced by private markets to increase profits); WHITNEY, supra note 10 (asserting that trusting is profitable as well as good); Bruce Chapman, Trust, Economic Rationality, and the Corporate Fiduciary Obligation, 43 U. TORONTO L.J. 547 (1993).
39. See FRANCIS FUKUYAMA, TRUST; THE SOCIAL VIRTUES AND THE CREATION OF PROSPERITY 7 (1995) (noting that a nation's ability to compete is conditioned by the level of trust inherent in the society); FRANCIS FUKUYAMA, GREAT DISRUPTION: HUMAN NATURE AND THE RECONSTITUTION OF SOCIAL ORDER 256 (1999) (defining attributes such as honesty and fairness as social capital, produced by private markets to increase profits); WHITNEY, supra note 10 (asserting that trusting is profitable as well as good); Bruce Chapman, Trust, Economic Rationality, and the Corporate Fiduciary Obligation, 43 U. TORONTO L.J. 547 (1993).
40. See FRANCIS FUKUYAMA, TRUST; THE SOCIAL VIRTUES AND THE CREATION OF PROSPERITY 7 (1995) (noting that a nation's ability to compete is conditioned by the level of trust inherent in the society); FRANCIS FUKUYAMA, GREAT DISRUPTION: HUMAN NATURE AND THE RECONSTITUTION OF SOCIAL ORDER 256 (1999) (defining attributes such as honesty and fairness as social capital, produced by private markets to increase profits); WHITNEY, supra note 10 (asserting that trusting is profitable as well as good); Bruce Chapman, Trust, Economic Rationality, and the Corporate Fiduciary Obligation, 43 U. TORONTO L.J. 547 (1993).
41. See FRANCIS FUKUYAMA, TRUST; THE SOCIAL VIRTUES AND THE CREATION OF PROSPERITY 7 (1995) (noting that a nation's ability to compete is conditioned by the level of trust inherent in the society); FRANCIS FUKUYAMA, GREAT DISRUPTION: HUMAN NATURE AND THE RECONSTITUTION OF SOCIAL ORDER 256 (1999) (defining attributes such as honesty and fairness as social capital, produced by private markets to increase profits); WHITNEY, supra note 10 (asserting that trusting is profitable as well as good); Bruce Chapman, Trust, Economic Rationality, and the Corporate Fiduciary Obligation, 43 U. TORONTO L.J. 547 (1993).
42. See GOVIER, supra note 2, at 6 (noting that the degree of trust increases with positive interactions, and decreases with negative interactions).
43. But see ROLF ZIEGLER, TRUST AND THE RELIABILITY Of EXPECTATIONS, RATIONALITY AND SOCIETY 427 (1998) ("In the short run, an actor may decide to raise his forecasting ability by increased but costly attention, but in the medium run it can only be improved by learning processes.").
44. See JOHN G. HOLMES & JOHN K. REMPEL, CLOSE RELATIONSHIPS 187, 192 (Clyde Hendrick ed. 1989) (citing Kelly & Stahelsk, 1970; Miller & Holmes, 1975).
45. See id.
46. See FUKUYAMA, supra note 21, at 78-79 (noting that Chinese, unlike American entrepreneurial families, are likely to remain small and internally managed due to distrust of outsiders).
47. See id. (noting that distrust of non-family members usually prevents institutionalization of Chinese businesses and drawing on outside talent). When trusting relationships have evolved not within the family but within a large work place, the work place is sufficiently large to maintain and nurture talent.
48. Note the following two examples: In the 1950s an aggressive and successful young underwriting firm, Otis & Co, reneged on its underwriting obligations on the ground that the issuer did not provide accurate information in its prospectus. The huge potential liability caused Otis to petition for bankruptcy protection. See Bankruptcy Referee Asks Court Dismiss Reorganization Plan, N.Y. TIMES, Dec. 9, 1992, at 53. The company was put up for sale even before the final decision. See Otis to Consider Offers for its Retail Business, N.Y. TIMES, July 28, 1951, at 17. Otis won the case. See Kaiser-Frazer Corp. v. Otis & Co., 195 F.2d 838 (2d Cir. 1952) (defendants won because contract at issue was unenforceable and prospectus misrepresentation was illegal under securities laws). The management of Salomon Brothers turned its attention away from employees that violate the law but brought substantial profits. See John H. Gutfreund, Exchange Act Release No. 31,554 (Dec. 3, 1992). Even though it settled the charges against it, it lost its independence five years thereafter to Travelers. See Thomas S. Mulligan, Travelers to Buy Salomon Bros. for $9 Billion, L.A. TIMES, Sept. 25, 1997 at A1, A12. After the 1991 scandal, Salomon was "financially crippled" and sold to Warran Buffet. When the company was sold again in 1997, a commentator noted that it "never really regained [its] position" after the scandal. Id.
49. Note the following two examples: In the 1950s an aggressive and successful young underwriting firm, Otis & Co, reneged on its underwriting obligations on the ground that the issuer did not provide accurate information in its prospectus. The huge potential liability caused Otis to petition for bankruptcy protection. See Bankruptcy Referee Asks Court Dismiss Reorganization Plan, N.Y. TIMES, Dec. 9, 1992, at 53. The company was put up for sale even before the final decision. See Otis to Consider Offers for its Retail Business, N.Y. TIMES, July 28, 1951, at 17. Otis won the case. See Kaiser-Frazer Corp. v. Otis & Co., 195 F.2d 838 (2d Cir. 1952) (defendants won because contract at issue was unenforceable and prospectus misrepresentation was illegal under securities laws). The management of Salomon Brothers turned its attention away from employees that violate the law but brought substantial profits. See John H. Gutfreund, Exchange Act Release No. 31,554 (Dec. 3, 1992). Even though it settled the charges against it, it lost its independence five years thereafter to Travelers. See Thomas S. Mulligan, Travelers to Buy Salomon Bros. for $9 Billion, L.A. TIMES, Sept. 25, 1997 at A1, A12. After the 1991 scandal, Salomon was "financially crippled" and sold to Warran Buffet. When the company was sold again in 1997, a commentator noted that it "never really regained [its] position" after the scandal. Id.
50. Note the following two examples: In the 1950s an aggressive and successful young underwriting firm, Otis & Co, reneged on its underwriting obligations on the ground that the issuer did not provide accurate information in its prospectus. The huge potential liability caused Otis to petition for bankruptcy protection. See Bankruptcy Referee Asks Court Dismiss Reorganization Plan, N.Y. TIMES, Dec. 9, 1992, at 53. The company was put up for sale even before the final decision. See Otis to Consider Offers for its Retail Business, N.Y. TIMES, July 28, 1951, at 17. Otis won the case. See Kaiser-Frazer Corp. v. Otis & Co., 195 F.2d 838 (2d Cir. 1952) (defendants won because contract at issue was unenforceable and prospectus misrepresentation was illegal under securities laws). The management of Salomon Brothers turned its attention away from employees that violate the law but brought substantial profits. See John H. Gutfreund, Exchange Act Release No. 31,554 (Dec. 3, 1992). Even though it settled the charges against it, it lost its independence five years thereafter to Travelers. See Thomas S. Mulligan, Travelers to Buy Salomon Bros. for $9 Billion, L.A. TIMES, Sept. 25, 1997 at A1, A12. After the 1991 scandal, Salomon was "financially crippled" and sold to Warran Buffet. When the company was sold again in 1997, a commentator noted that it "never really regained [its] position" after the scandal. Id.
51. Note the following two examples: In the 1950s an aggressive and successful young underwriting firm, Otis & Co, reneged on its underwriting obligations on the ground that the issuer did not provide accurate information in its prospectus. The huge potential liability caused Otis to petition for bankruptcy protection. See Bankruptcy Referee Asks Court Dismiss Reorganization Plan, N.Y. TIMES, Dec. 9, 1992, at 53. The company was put up for sale even before the final decision. See Otis to Consider Offers for its Retail Business, N.Y. TIMES, July 28, 1951, at 17. Otis won the case. See Kaiser-Frazer Corp. v. Otis & Co., 195 F.2d 838 (2d Cir. 1952) (defendants won because contract at issue was unenforceable and prospectus misrepresentation was illegal under securities laws). The management of Salomon Brothers turned its attention away from employees that violate the law but brought substantial profits. See John H. Gutfreund, Exchange Act Release No. 31,554 (Dec. 3, 1992). Even though it settled the charges against it, it lost its independence five years thereafter to Travelers. See Thomas S. Mulligan, Travelers to Buy Salomon Bros. for $9 Billion, L.A. TIMES, Sept. 25, 1997 at A1, A12. After the 1991 scandal, Salomon was "financially crippled" and sold to Warran Buffet. When the company was sold again in 1997, a commentator noted that it "never really regained [its] position" after the scandal. Id.
52. Note the following two examples: In the 1950s an aggressive and successful young underwriting firm, Otis & Co, reneged on its underwriting obligations on the ground that the issuer did not provide accurate information in its prospectus. The huge potential liability caused Otis to petition for bankruptcy protection. See Bankruptcy Referee Asks Court Dismiss Reorganization Plan, N.Y. TIMES, Dec. 9, 1992, at 53. The company was put up for sale even before the final decision. See Otis to Consider Offers for its Retail Business, N.Y. TIMES, July 28, 1951, at 17. Otis won the case. See Kaiser-Frazer Corp. v. Otis & Co., 195 F.2d 838 (2d Cir. 1952) (defendants won because contract at issue was unenforceable and prospectus misrepresentation was illegal under securities laws). The management of Salomon Brothers turned its attention away from employees that violate the law but brought substantial profits. See John H. Gutfreund, Exchange Act Release No. 31,554 (Dec. 3, 1992). Even though it settled the charges against it, it lost its independence five years thereafter to Travelers. See Thomas S. Mulligan, Travelers to Buy Salomon Bros. for $9 Billion, L.A. TIMES, Sept. 25, 1997 at A1, A12. After the 1991 scandal, Salomon was "financially crippled" and sold to Warran Buffet. When the company was sold again in 1997, a commentator noted that it "never really regained [its] position" after the scandal. Id.
53. Note the following two examples: In the 1950s an aggressive and successful young underwriting firm, Otis & Co, reneged on its underwriting obligations on the ground that the issuer did not provide accurate information in its prospectus. The huge potential liability caused Otis to petition for bankruptcy protection. See Bankruptcy Referee Asks Court Dismiss Reorganization Plan, N.Y. TIMES, Dec. 9, 1992, at 53. The company was put up for sale even before the final decision. See Otis to Consider Offers for its Retail Business, N.Y. TIMES, July 28, 1951, at 17. Otis won the case. See Kaiser-Frazer Corp. v. Otis & Co., 195 F.2d 838 (2d Cir. 1952) (defendants won because contract at issue was unenforceable and prospectus misrepresentation was illegal under securities laws). The management of Salomon Brothers turned its attention away from employees that violate the law but brought substantial profits. See John H. Gutfreund, Exchange Act Release No. 31,554 (Dec. 3, 1992). Even though it settled the charges against it, it lost its independence five years thereafter to Travelers. See Thomas S. Mulligan, Travelers to Buy Salomon Bros. for $9 Billion, L.A. TIMES, Sept. 25, 1997 at A1, A12. After the 1991 scandal, Salomon was "financially crippled" and sold to Warran Buffet. When the company was sold again in 1997, a commentator noted that it "never really regained [its] position" after the scandal. Id.
54. See GOVIER, supra note 2, at 206 (noting that public perceptions of leaders of an organization reflect upon the individual members; this is exemplified by the widespread use of advertising).
55. For centuries, intermediaries have served to reduce the cost of trusting relationships among strangers. Financial intermediaries earned their keep by creating trusting relationships with customers, and enforcing promises among strangers. For example, the Rothschilds have facilitated trusting relationships by inter-positioning themselves among unknown parties, and offering a competent family network backed by substantial capital. Likewise, banks have offered letters of credit to establish a trusting relationship among traders in different lands. Purchases by catalogs are made possible by the inter-positioning of banks and credit card banking associations. The securities markets would not exist without the inter-positioning of brokers and dealers, who ensure execution of transactions among strangers in volatile markets. While it is likely that one of the parties will renege on the trade, the intermediary has an interest in executing the transaction because that is when the intermediary receives his compensation. Very few trades are litigated for breach. Intermediaries perform similar functions in other markets.
56. In comparing American impersonal trusting with Japanese personal trusting, one can see the weakness of the Japanese system. The focal point of this weakness is with regard to financial institutions, which Japan is now remodeling. In an international economy, impersonal trusting has become crucial to national economic prosperity.
57. For example, many state laws prohibit banks from penalizing borrowers who wish to refinance mortgages (that is, pay off their mortgage loans and take loans at lower interest).
58. See GOVIER, supra note 2, at 153. Social trust is based on the experience of individuals and groups. People involved in associations are not likely to let others down, for their personal reputations would suffer if they did. "For politics, economics, and personal well-being, social trust is a valuable resource." Id.
59. See GOVIER, supra note 2, at 153. Social trust is based on the experience of individuals and groups. People involved in associations are not likely to let others down, for their personal reputations would suffer if they did. "For politics, economics, and personal well-being, social trust is a valuable resource." Id.
60. See GOVIER, supra note 2, at 24-25 (contrasting modern trust in institutions with Swedish village life where consumers only transact with known merchants). A sociologist "ties modern trust more to people's sense of how institutions operate than to their attitudes towards unknown individuals." Id.
61. See GOVIER, supra note 2, at 24-25 (contrasting modern trust in institutions with Swedish village life where consumers only transact with known merchants). A sociologist "ties modern trust more to people's sense of how institutions operate than to their attitudes towards unknown individuals." Id.
62. See id. at 29 ("To live in a complex society without going mad, we must have trust in systems too.").
63. Most business relationships on the Internet today do not involve the offer and receipt of personal services, such as medical and legal services, which must involve a higher level of trusting than purchasing goods. Through the Internet, trading transactions are more costly and riskier than in real space for the same reasons that medical and legal services are costlier in real space.
64. See Unsolicited Commercial Electronic Mail Act of 2001, H.R. 95, 107th Cong. (2001).
65. Consumers who are not familiar with communicating on the Internet seem to be more gullible than they would be in real space. They view experts in Internet communications as more trustworthy. Thus there is something like a reverse order: expertise produces dependency and dependency produces trust.
66. Russell Hardin defines trust mostly in terms of encapsulated interest. See Russell Hardin, Trust and Trustworthiness, 81 B.U. L. REV. (forthcoming June 2001). I argue that encapsulated interest is a risk-reducing situation that contributes to trusting but is not trusting per se.
67. See DIEGO GAMBETTA, THE SICILIAN MAFIA: THE BUSINESS OF PRIVATE PROTECTION 28 (1993) ("[G]ood behavior in business evolve[s] from an economic interest in keeping promises and acquiring a reputation for honest dealing. . . . This may also explain why the opposite norm obtains and the ability to cheat is praised and encouraged."); see also Hardin, supra note 39 (explaining that our first reaction is to distrust those about whom we have little knowledge).
68. See DIEGO GAMBETTA, THE SICILIAN MAFIA: THE BUSINESS OF PRIVATE PROTECTION 28 (1993) ("[G]ood behavior in business evolve[s] from an economic interest in keeping promises and acquiring a reputation for honest dealing. . . . This may also explain why the opposite norm obtains and the ability to cheat is praised and encouraged."); see also Hardin, supra note 39 (explaining that our first reaction is to distrust those about whom we have little knowledge).
69. Market reputation has a different weight than personal observation, yet can carry weight of the aggregate opinion of others. It is more like price, a "black box," unless others have similar concerns. Reputation is a marketing device, distinguishing competitors in the markets. Trustworthy people offer reduced information costs to other parties, and can therefore charge more for their services and products. When transactions are trust-dependent to the extent that most people would not engage in a business relationship without trusting, the assurance of trusting becomes crucial to the transaction. In such a case, the interference of the law as a guarantor of trustworthiness may be cost reducing and even necessary.
70. See eBay (visited Mar. 12, 2001) 〈http://pages.ebay.com/help/basics/n-is-ebay-safe.html〉 (touting site's "built-in safeguards" to ensure buyers and sellers are "honest and reliable").
71. See ROBERT AXELROD, THE COMPLEXITY OF COOPERATION: AGENT-BASED MODELS OF COMPETITION AND COOPERATION 65-66 (1997) (describing metanorms).
72. See Financial Services Technology Consortium (visited March 9, 2001) 〈http://www.fstc.org〉 (comprising 90 organizations working in collaboration to create new methods for "commercial transaction on the Internet").
73. It is suggested that the value of hoard directorship for busy corporate leaders is in "networking" and current information, including information about other actors in their field.
74. See Moody's Investor Service (visited March 9, 2001) 〈http://www.moodys.com〉 (providing "independent credit ratings research and financial information" to help investors analyze credit risks and reduce transaction costs).
75. Banks have offered a similar service in the form of letters of credit since the seventeenth century. The letters of credit, however, provide a guarantee to parties abroad, who do not know, and therefore, do not trust the domestic parties' promises. The bank undertakes, unconditionally, the obligation to pay upon presentation of the bills of lending, providing evidence that the goods have arrived.
76. See Bernard S. Black & Ronald J. Gilson, Venture Capital and The Structure of Capital Markets: Banks versus Stock Markets, 47 J. FIN. ECON. 243, 253 (1998) (stating that venture capital funds have an incentive to "monitor entrepreneurs' performance"); see also Symposium, The Internet and Small Business Capital Formation, 2 J. SMALL & EMERGING BUS. L. 1 (1998) (stating that venture capital companies also provide a similar, though more intrusive service):
77. See Bernard S. Black & Ronald J. Gilson, Venture Capital and The Structure of Capital Markets: Banks versus Stock Markets, 47 J. FIN. ECON. 243, 253 (1998) (stating that venture capital funds have an incentive to "monitor entrepreneurs' performance"); see also Symposium, The Internet and Small Business Capital Formation, 2 J. SMALL & EMERGING BUS. L. 1 (1998) (stating that venture capital companies also provide a similar, though more intrusive service):
78. Stephen J. Choi, Gatekeepers and the Internet: Rethinking the Regulations of Small Business Capital Formation. 2 J. SMALL & EMERGING BUS. L. 27. 45 (1998).
79. See Federal Trade Commission (visited March 9, 2001) 〈http://www.ftc.gov〉 ("The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them.").
80. See Center for Democracy and Technology (visited March 9, 2001) 〈http://www.cdt.org〉 (seeking "practical solutions to enhance free expression and privacy in global communication technologies").
81. See TRUSTe (visited March 9, 2001) 〈http://www.truste.org〉 (committed to helping web users "protect themselves online").
82. Groups with similar interests undertake to enforce the members' obligations to be trustworthy, thereby maintaining the trustworthiness of the group. See Tamar Frankel, Should Funds and Investment Advisers Establish a Self-regulatory Organization?, in THE FINANCIAL SERVICES REVOLUTION, UNDERSTANDING THE CHANGING ROLES OF BANKS, MUTUAL FUNDS AND INSURANCE COMPANIES, 447, 451 (Clifford E. Kirsch ed., 1997) (explaining that membership organizations protect the members' reputations while also establishing ethical standards).
83. For example, assume that a person wishes to hand over his life's savings, $100, to a manager, expecting $7 in additional benefits in terms of performance and free time, and paying the manager $1 for his work. Assume further that the probability of losing the $100 through the manager's conversion or incompetence is 50%. The person will not engage in this transaction because he will not risk losing $50 even if the probability of gaining $6 is very high. He will, however, interact if the manager provides him with assurance as to the integrity of the money. However, the manager cannot expend more than $1 minus his living expenses to provide that assurance. If the cost to the manager of assuring his trustworthiness is higher, he will not offer it and the parties will not interact. Someone will have to bridge the gap. That someone may be market verifiers, who can offer verification at a reduced rate, or the law, through a requirement for insurance, examinations, and other preventive measures, can ensure either that the money will not be converted, or that the manager is competent. Trusted private sector qualifiers, however, must also prove their trustworthiness. The law regulates the most trusted private sector qualifiers, such as lawyers and accountants.
84. See Gramm-Leach-Bliley Act § 504, 15 U.S.C. § 6804 (1999) (requiring specified federal agencies to adopt rules restricting the ability of certain financial institutions to "disclose nonpublic personal information about consumers").
85. See Privacy of Consumer Financial Information (Regulation S-P), 65 Fed. Reg. 12,354 (2000) (to be codified at 17 C.F.R. pt. 248) (proposed Mar. 2, 2000).
86. See Privacy of Consumer Financial Information, 65 Fed. Reg. 8770 (2000) (to be codified at 12 C.F.R. pt. 332) (proposed Feb. 22, 2000).
87. See LAWRENCE LESSIG, CODE AND OTHER LAWS OF CYBERSPACE (1999); Lawrence Lessig, Preface to Trust, 81 B.U. L. REV 329 (stating that the use of code or technology can obviate the need to trust).
88. See LAWRENCE LESSIG, CODE AND OTHER LAWS OF CYBERSPACE (1999); Lawrence Lessig, Preface to Trust, 81 B.U. L. REV 329 (stating that the use of code or technology can obviate the need to trust).
89. See id. (arguing that technological protection replaces the important social act of trusting); see also Helen Nissenbaum, Securing Trust Online: Wisdom or Oxymoron? 81 B.U. L. REV. (forthcoming 2001) (arguing that security measures on the internet actually lower trusting behaviors by creating safe environments under which the act of trusting, i.e. the act of being vulnerable to another's discretion, is unnecessary).
90. See id. (arguing that technological protection replaces the important social act of trusting); see also Helen Nissenbaum, Securing Trust Online: Wisdom or Oxymoron? 81 B.U. L. REV. (forthcoming 2001) (arguing that security measures on the internet actually lower trusting behaviors by creating safe environments under which the act of trusting, i.e. the act of being vulnerable to another's discretion, is unnecessary).