Trusting and trustworthiness

Boston University Law Review

Volumn 81, Issue 3, 2001, Pages 523-551

  Ben Ner, Avner ^a   Putterman, Louis ^a  

^a NONE

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EID: 0035615257     PISSN: 00068047     EISSN: None     Source Type: Journal    
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References (72)

1. See, e.g., Joyce Berg et al., Trust Reciprocity and Social History, 10 GAMES AND ECONOMIC BEHAVIOR 122 (1995) (reporting the results of their controlled experiment based on human trust of an anonymous counterpart); Elizabeth Hoffman et al., Behavioral Foundations of Reciprocity: Experimental Economics and Evolutionary Psychology, 36 Economic Inquiry 335, 345 (1998) (finding that both parties to the experiments relied on trust of one another for mutual gain). Unlike the depiction just given, the standard trust game experiment does not permit A and B to communicate, so the problem is even more difficult. A can only conjecture that B might return some of any money given. The problem faced is still said to be one of trust: not trust in B's word, now, but trust in B's adherence to a norm of reciprocity, or some similar expectation.
2. See, e.g., Joyce Berg et al., Trust Reciprocity and Social History, 10 GAMES AND ECONOMIC BEHAVIOR 122 (1995) (reporting the results of their controlled experiment based on human trust of an anonymous counterpart); Elizabeth Hoffman et al., Behavioral Foundations of Reciprocity: Experimental Economics and Evolutionary Psychology, 36 Economic Inquiry 335, 345 (1998) (finding that both parties to the experiments relied on trust of one another for mutual gain). Unlike the depiction just given, the standard trust game experiment does not permit A and B to communicate, so the problem is even more difficult. A can only conjecture that B might return some of any money given. The problem faced is still said to be one of trust: not trust in B's word, now, but trust in B's adherence to a norm of reciprocity, or some similar expectation.
3. Of course, the two problems are not necessarily separable in the sense that A's estimates of B's likelihood of following through may well be a function of what deal is proposed. Thus choice among possible deals may be influenced by these estimates.
4. The more complex case in which A attaches non-zero probabilities to B's returning $11, $10, and so on, is also tractable, but unnecessary to explore here.
5. See Avner Ben-Ner & Louis Putterman, Values and Institutions in Economic Analysis, in ECONOMICS, VALUES, AND ORGANIZATION 12-26 (Avner Ben-Ner & Louis Putterman eds., Cambridge University Press 1998).
6. But, to add further complexity, a scheming person may seek out opportunities having no apparent bearing on reputation in order to feign a good character.
7. See Ben-Ner & Putterman, supra note 4, at 17-51 (discussing the origin and evolution of preferences and their effect on the economy); see also Avner Ben-Ner & Louis Putterman. On Some Implications of Evolutionary Psychology for the Study of Preferences and Institutions, 43 JOURNAL OF ECONOMIC BEHAVIOR AND ORGANIZATION 91-99 (2000) [hereinafter Ben-Ner & Putterman, Evolutionary Psychology] (discussing the application of socio-biology and evolutionary psychology to economics).
8. See Ben-Ner & Putterman, supra note 4, at 17-51 (discussing the origin and evolution of preferences and their effect on the economy); see also Avner Ben-Ner & Louis Putterman. On Some Implications of Evolutionary Psychology for the Study of Preferences and Institutions, 43 JOURNAL OF ECONOMIC BEHAVIOR AND ORGANIZATION 91-99 (2000) [hereinafter Ben-Ner & Putterman, Evolutionary Psychology] (discussing the application of socio-biology and evolutionary psychology to economics).
9. See NOAM CHOMSKY, LANGUAGE AND PROBLEMS OF KNOWLEDGE: THE MANAGUA LECTURES, 150-53 (Cambridge University Press 1988); STEVEN PINKER, THE LANGUAGE INSTINCT 237 (William Morrow & Co. 1994) (demonstrating that humans share universal mental mechanisms for learning languages).
10. See NOAM CHOMSKY, LANGUAGE AND PROBLEMS OF KNOWLEDGE: THE MANAGUA LECTURES, 150-53 (Cambridge University Press 1988); STEVEN PINKER, THE LANGUAGE INSTINCT 237 (William Morrow & Co. 1994) (demonstrating that humans share universal mental mechanisms for learning languages).
11. See ROBERT BOYD & PETER J. RICHERSON, CULTURE AND THE EVOLUTIONARY PROCESS 132-33 (University of Chicago Press 1985) (providing a co-evolutionary model of human behavior in which genes and culture evolve through the action of partly related, partly distinct selection pressures).
12. See Ben-Ner & Putterman, supra note 4, at 36-37.
13. While a large impact of even one experience is to be expected, even on strictly rational grounds, the effects are likely to be magnified by the psychological tendency to over-generalize from recent or personal experience (fears of flying sky-rocket after a well-publicized airline disaster). One's sense of personal competence is strongly influenced by one's latest success or failure.
14. See, e.g., MARK S. GRANOVETTER, GETTING A JOB: A STUDY OF CONTACTS AND CAREERS 85 (University of Chicago Press 1995) (stating that people rely on contacts acquired through various social and work settings to obtain information about potential career opportunities); Robert D. Putnam, Tuning In, Tuning Out: The Strange Disappearance of Social Capital in America, 28 POLITICAL SCIENCE AND POLITICS 664, 664-65 (1995) (explaining that the level of trust between individuals increases when the level of their social interaction increases).
15. See, e.g., MARK S. GRANOVETTER, GETTING A JOB: A STUDY OF CONTACTS AND CAREERS 85 (University of Chicago Press 1995) (stating that people rely on contacts acquired through various social and work settings to obtain information about potential career opportunities); Robert D. Putnam, Tuning In, Tuning Out: The Strange Disappearance of Social Capital in America, 28 POLITICAL SCIENCE AND POLITICS 664, 664-65 (1995) (explaining that the level of trust between individuals increases when the level of their social interaction increases).
16. The evolutionary source of this tendency is probably the advantage gained from recognizing one's own kin and band members. See ROBERT WRIGHT, THE MORAL ANIMAL: THE NEW SCIENCE OF EVOLUTIONARY PSYCHOLOGY 160-61, 200-01, 203-04 (Vintage Books 1994).
17. One might consciously choose to endure a few more instances of "being taken for a ride" as an acceptable cost of "being a trusting type" and cultivating trust relations with others. On the other hand, a person of chronically negative disposition may unconsciously invite disappointments, taking pleasure in validations of her negative view of others.
18. B might also, of course, engage in acts intended to create the impression of good character without having such a character in actuality.
19. See Benjamin Klein et al., Vertical Integration, Appropriable Rents and the Competitive Contracting Process, 21 J. L. & ECON. 297, 304 (1978) (discussing enforcement rents as a method of deterring a party from cheating).
20. See WRIGHT, supra note 12, at 263-86. In fact, the reality is likely to be less black-and-white. Perhaps only a handful of individuals are trustworthy in every situation. Quite a few more are trustworthy in some situations but not others, depending partly upon the cost to them. Moreover, in order to project trustworthiness convincingly, individuals have an incentive to convince themselves that they are trustworthy, perhaps more trustworthy than they really are. There is thus likely to be a large number of individuals who believe themselves to be quite trustworthy and who are indeed so in a considerable range of circumstances, although not fully trustworthy in every situation. See id.
21. See WRIGHT, supra note 12, at 263-86. In fact, the reality is likely to be less black-and-white. Perhaps only a handful of individuals are trustworthy in every situation. Quite a few more are trustworthy in some situations but not others, depending partly upon the cost to them. Moreover, in order to project trustworthiness convincingly, individuals have an incentive to convince themselves that they are trustworthy, perhaps more trustworthy than they really are. There is thus likely to be a large number of individuals who believe themselves to be quite trustworthy and who are indeed so in a considerable range of circumstances, although not fully trustworthy in every situation. See id.
22. See Avner Ben-Ner & Theresa Van Hoomissen, Nonprofit Organizations in the Mixed Economy: A Demand and Supply Analysis, 62 ANNALS OF PUB. & COOP. ECON. 519, 527-29 (1991) (discussing the differences of trustworthiness of different types of organizations and arguing that greater trustworthiness in the delivery of so-called "trust goods" may be the raison d'etre of some nonprofit organizations).
23. See WRIGHT, supra note 12, at 263-86. In fact, the reality is likely to be less black-and-white. Perhaps only a handful of individuals are trustworthy in every situation. Quite a few more are trustworthy in some situations but not others, depending partly upon the cost to them. Moreover, in order to project trustworthiness convincingly, individuals have an incentive to convince themselves that they are trustworthy, perhaps more trustworthy than they really are. There is thus likely to be a large number of individuals who believe themselves to be quite trustworthy and who are indeed so in a considerable range of circumstances, although not fully trustworthy in every situation. See id.
24. See David M. Kreps, Corporate Culture and Economic Theory, in PERSPECTIVES ON POSITIVE POLITICAL ECONOMY (James Alt & Kenneth Shepsle eds., Cambridge University Press) (exploring how the concept of corporate culture can be incorporated into economic analysis).
25. The Race to Grab Up Tylenol's Market, CHEMICAL WEEK, Nov. 3, 1982, at 30.
26. Rebecca Fannin, Diary of an Amazing Comeback, MARKETING AND MEDIA DECISIONS, Spring 1983, at 130.
27. See Donald Zochert, 2-Time Loser: Ibuprofen to Gain From Tylenol Plight, ADVERTISING AGE, Feb. 17, 1986, at 1 (stating that repackaging and reintroducing Tylenol cost McNeil one hundred million dollars); Johnson & Johnson Reincarnates A Brand, SALES & MARKETING MANAGEMENT, Jan. 16, 1984, at 163 (stating that the rebirth of Tylenol cost an estimated one hundred million dollars). The one hundred million dollar figure includes the cost of recalling the bottles, exchanging "safe" bottles for potentially tampered bottles, marketing two dollar and fifty cent coupons for new purchases, and creating the tamper-evident packaging. This figure does not include advertising costs. See BUSINESS WEEK, Feb. 24, 1986, at 42.
28. See Donald Zochert, 2-Time Loser: Ibuprofen to Gain From Tylenol Plight, ADVERTISING AGE, Feb. 17, 1986, at 1 (stating that repackaging and reintroducing Tylenol cost McNeil one hundred million dollars); Johnson & Johnson Reincarnates A Brand, SALES & MARKETING MANAGEMENT, Jan. 16, 1984, at 163 (stating that the rebirth of Tylenol cost an estimated one hundred million dollars). The one hundred million dollar figure includes the cost of recalling the bottles, exchanging "safe" bottles for potentially tampered bottles, marketing two dollar and fifty cent coupons for new purchases, and creating the tamper-evident packaging. This figure does not include advertising costs. See BUSINESS WEEK, Feb. 24, 1986, at 42.
29. See Donald Zochert, 2-Time Loser: Ibuprofen to Gain From Tylenol Plight, ADVERTISING AGE, Feb. 17, 1986, at 1 (stating that repackaging and reintroducing Tylenol cost McNeil one hundred million dollars); Johnson & Johnson Reincarnates A Brand, SALES & MARKETING MANAGEMENT, Jan. 16, 1984, at 163 (stating that the rebirth of Tylenol cost an estimated one hundred million dollars). The one hundred million dollar figure includes the cost of recalling the bottles, exchanging "safe" bottles for potentially tampered bottles, marketing two dollar and fifty cent coupons for new purchases, and creating the tamper-evident packaging. This figure does not include advertising costs. See BUSINESS WEEK, Feb. 24, 1986, at 42.
30. See Joseph Webber, A Big Company that Works: J&J's Ralph Larsen Gives His Units a Lot of Latitude - and They Produce, BUSINESS WEEK, May 4, 1992, at 124, 127 (noting that the Tylenol franchise earned an estimated one billion dollars in annual sales).
31. Our arguments on the roles of advertising, conspicuous displays, and price premia parallels that of Benjamin Klein & Keith B. Leffler, The Role of Market Forces in Assuring Contractual Performance, 89 JOURNAL OF POLITICAL ECONOMY 615, 630 (1981) (asserting that consumers link price premiums with high quality). Those authors note that the consumer need not understand the economic reasons why more advertising and a higher price are indicators of high quality; it is only necessary that consumers notice a correlation between advertising, price, and quality, and make their purchasing decisions accordingly.
32. See id. at 626 (declaring that brand name investments are motivated by expected wealth increases).
33. Cf. George Akerlof, Labor Contracts as Partial Gift Exchange, 47 Q. J. ECON. 543, 550 (1982). Akerlof suggests that employee's effort levels depend in part on their assessments of the moral worth of the company they work for. With regard to the attribution of personhood to the company, Akerlof writes: "Persons who work for an institution (a firm in this case) tend to develop sentiment . . . for that institution; to a great extent they anthropomorphize these institutions (e.g., 'the friendly bank')."
34. See MARTIN BROWN ET AL., CONTRACTUAL INCOMPLETENESS AND THE NATURE OF MARKET INTERACTIONS (University of Zurich for Empirical Research in Economics, March 2001) Brown et al. demonstrate the emergence of such ongoing trading relationships in a recent experiment. They arbitrarily assign subjects to the roles of "buyer" or "seller." Pairs of buyers and sellers must come together and agree on the price at which a good will be sold, and on its quality level. Agreed price terms have to be adhered to, but the experimental set-up allows the seller to renege on quality. Most subjects who are assigned the role of sellers are found to fulfill their quality commitments, and stable ongoing relationships are formed. In a comparison treatment in which sellers are required by the experimental design to adhere to the quality agreed on, there is no longer an incentive to form long-term relationships, and buyers tend to move randomly from one seller to another.
35. The example is ironic because excessive vertical integration was also a widely reported characteristic of the non-market system of the former Soviet Union, where lack of trust between central planners and enterprise managers, rather than parties to market exchange, engendered it. See Avner Ben-Ner & Egon Neuberger, Towards an Economic Theory of the Firm in the Centrally Planned Economy: Transaction Costs, Internalization and Externalization, 144 JOURNAL OF INSTITUTIONAL & THEORETICAL ECONOMICS 839, 841 (1988) (suggesting that externalizing the enterprise from the state by making it an independent accounting unit is a potential remedy for incentive and information problems in a planned economy).
36. See Eileen A.J. Connelly, Spitzer Pushes Internet Privacy Legislation (last modified May 10, 2000) 〈http://globalsecurityweb.com/privacylegislation.html〉. The legal requirements concerning treatment of personal information obtained in the course of ordinary trading vary considerably across countries. European Union countries significantly limit the transfer of personal data, whereas in the United States the existing legislation (as opposed to the some that is being currently discussed) is rather lax. Laws against selling credit information or using it to charge consumers for products that they have not purchased are universal.
37. The consumer wants to know, for example, if the medicine in the bottle is effective, and even if the medicine is what the bottle purports it to be - if it really is Tylenol.
38. See Edward Robinson, Click and Cover, BUSINESS 2.0, Sept. 12, 2000, at 170-74. One survey conducted last year by Privacy & American Business . . . found a staggering 92 percent of consumers are concerned about the potential misuse of their personal data online. More poignantly, another study, this one administered by Harris Interactive for IBM last fall, found that 54 percent of consumers have decided not to purchase from an online enterprise because they weren't sure how the company would use their personal information. Forrester Research estimates that consumer fear over privacy resulted in almost $3 billion in lost online retail sales in 1999 - around 10 percent of what online shoppers spent last year. If all that isn't enough, the IBM study also found that consumers trust Internet business the least when it comes to handling personal information - behind banks, insurers, even credit card providers and cataloguers, companies that have traditionally been the source of the greatest consumer angst. Id.
39. See supra Part I.A (discussing a formula for calculating A's assessment of B's trustworthiness).
40. The most common example of spreading online rumors involve attempts to affect a company's stock price to the advantage of the rumor-monger.
41. See VeriSign Reports Fourth Quarter and Fiscal 2000 Results (visited Jan. 27, 2001) 〈http://www.corporate.verisign.com〉.
42. See id.
43. See Verisign Marketing Summary 〈http://verisign.com/isp/rsc/mktg/promo.html〉.
44. The need to share knowledge, capacity, and other resources are not the only reasons for alliances among firms. A survey of large and reputable firms' web sites reveals an amazing array of alliances which, at least in some publicized cases, involve mainly the "rubbing off" of the large company's reputation on the smaller and newer partner, often for a fee paid by the latter.
45. Nonprofit organizations and universities are often courted to partner with new online companies. For example, in March 2000 FairNetworks, an online rating service, began operating as Open Ratings, offering a more sophisticated, independent rating service. Co-founded by MIT Media Lab e-commerce expert Pattie Macs and backed by Atlas Venture and Nicholas Negroponte, the service proposes to drastically increase the level of trust, reliability and brand recognition between buyers and sellers in online business to business, consumer and auction marketplaces. See MIT Media Lab E-Commerce Curur Pattie Maes Debuts New Venture; Open Ratings To Offer Sophisticated E-Commerce Ratings Service 〈http://openratings.com/corporate/releases/pressrelease_archive/index. html〉.
46. See Robinson, supra note 30, at 170.
47. See Robinson, supra note 30, at 120.
48. See Jaennette Brosig et al., Why Does Communication Enhance Cooperation? 3 (2000) (unpublished manuscript, on file with author) (suggesting that the success of coordination efforts in communication is determined not only by the linguistic content of the communication, but also by the medium used to communicate).
49. See, e.g., id. at 4 app. 1 (listing instructions for this type of experiment).
50. See, e.g., Mark Issac & James Walker, Communication and Free-Riding Behavior: The Voluntary Contribution Mechanism, 26 ECON. INQUIRY 585, 591 (1988) (noting in Figure 1 the average percentage of contributions to the group by individuals).
51. See, e.g., id. at 585-08 (noting in Figure 1 that the average percentages of contributions stabilized at 100% when pre-play communication was allowed); James Walker et al., Communication in a Commons: Cooperation without External Enforcement, in LABORATORY RESEARCH IN POLITICAL ECONOMY 287-322 (University of Michigan Press 1991); Olivier Bochet et al., Cheap Talk and Punishment in Voluntary Contribution Experiments (June 2001) (unpublished manuscript, on file with Brown University Department of Economics).
52. See, e.g., id. at 585-08 (noting in Figure 1 that the average percentages of contributions stabilized at 100% when pre-play communication was allowed); James Walker et al., Communication in a Commons: Cooperation without External Enforcement, in LABORATORY RESEARCH IN POLITICAL ECONOMY 287-322 (University of Michigan Press 1991); Olivier Bochet et al., Cheap Talk and Punishment in Voluntary Contribution Experiments (June 2001) (unpublished manuscript, on file with Brown University Department of Economics).
53. See, e.g., id. at 585-08 (noting in Figure 1 that the average percentages of contributions stabilized at 100% when pre-play communication was allowed); James Walker et al., Communication in a Commons: Cooperation without External Enforcement, in LABORATORY RESEARCH IN POLITICAL ECONOMY 287-322 (University of Michigan Press 1991); Olivier Bochet et al., Cheap Talk and Punishment in Voluntary Contribution Experiments (June 2001) (unpublished manuscript, on file with Brown University Department of Economics).
54. See Brosig, supra note 40, at 4-5 (describing the seven treatments used in the experiment, varying only by communication opportunities).
55. See id. 46 See id. at 9. By 30% effectiveness, we mean that combined earnings in this treatment are 30% of the way between the lower earnings in the baseline treatment and the higher earnings in the treatment with face-to-face communication.
56. Id. at 9 (showing in Figure 2 the levels of cooperation and average contribution). Relatedly, Olivier Bochet, Talbot Page and Louis Putterman carried out treatments in which subjects could communicate their intentions only numerically by indicating numbers of dollars they might put in the group account; they could not communicate with words and had no audio or video contact with their anonymous fellow group members. They found no increase in efficiency in the numerical communication treatment over their baseline no-communication treatment, but confirmed a very large efficiency gain following face-to-face communication. Preliminary results of a further set of experiments by these researchers show communicating anonymously in an online chat room to be nearly as effective as face-to-face communication when the full subject pool from which anonymous groups are formed are seated in the same room. See Olivier Bochet et al., supra note 44.
57. See Brosig, supra note 40, at 20 (suspecting this evolution as the reason why face-to-face communication is significantly more successful than other forms of communication).
58. It has been suggested that facial expression may be an important aid in revealing sincerity or lying. See, e.g.. ROBERT FRANK, PASSIONS WITHIN REASON: THE STRATEGIC ROLE OF THE EMOTIONS 9 (1988) (noting furtive glances and difficulty in making eye contact as indications of a lie). Many biologists, evolutionary psychologists, and neuroscientists have also emphasized the importance of capacities for recognizing faces, interpreting their expressions, and even, in the jargon of some, "mind reading." While it is tempting to read the results of Brosig et al. as being partly explained by these studies, a recent experiment by Axel Ockenfels and Reinhard Selten undermines the hypothesis that people can detect lying on the basis of facial expressions. Axel Ockenfels & Reinhard Selten, An Experiment on the Hypothesis of Involuntary Truth-Signalling in Bargaining 17-18 (unpublished manuscript, on file with author) (arguing that involuntary truth-signaling is non-existent in the bargaining context).
59. It has been suggested that facial expression may be an important aid in revealing sincerity or lying. See, e.g.. ROBERT FRANK, PASSIONS WITHIN REASON: THE STRATEGIC ROLE OF THE EMOTIONS 9 (1988) (noting furtive glances and difficulty in making eye contact as indications of a lie). Many biologists, evolutionary psychologists, and neuroscientists have also emphasized the importance of capacities for recognizing faces, interpreting their expressions, and even, in the jargon of some, "mind reading." While it is tempting to read the results of Brosig et al. as being partly explained by these studies, a recent experiment by Axel Ockenfels and Reinhard Selten undermines the hypothesis that people can detect lying on the basis of facial expressions. Axel Ockenfels & Reinhard Selten, An Experiment on the Hypothesis of Involuntary Truth-Signalling in Bargaining 17-18 (unpublished manuscript, on file with author) (arguing that involuntary truth-signaling is non-existent in the bargaining context).
60. ROBERT WRIGHT, NONZERO: THE LOGIC OF HUMAN DESTINY (Pantheon Books 2000).
61. See id. at 94, 201-02.
62. The familiar disclosure, "your call may be monitored to assure quality of service," comes to mind.
63. See Timothy J. Mullaney, This Race Isn't Even Close, BUSINESS WEEK, Dec. 18, 2000, at 208 (noting Amazon's quick "market cap" decline).
64. See THE WALL STREET JOURNAL, April 15, 1999, at B14 (reporting the financial woes of Amazon.com).
65. See Leslie Helm, The Cutting Edge, L.A. TIMES, July 19, 1999, at Cl (discussing how Blue Mountain transitioned to online retailing).
66. See Leslie Walker, Click a Card, WASH, POST, Dec. 16, 1999, at E1.
67. See id. (reporting Excite@Home's acquisition of Bluemountain.com).
68. See supra notes 53-57 and accompanying text (discussing the high market value and selling prices of online firms that consistently operate at a loss).
69. See Armen A. Alchian, Specificity, Specialization, and Coalitions, 140 J. INSTITUTIONAL AND THEORETICAL ECON. 34-35 (1984) (suggesting that some firms buy other firms with successfully cooperating teams because creating a new team from scratch can be expected to cost at least as much).
70. We mention financial viability because of the possibility that appropriate behavior on the part of employees can be elicited only through financially prohibitive incentives that eventually lead to bankruptcy. The allocation of stock to employees is one way in which many firms seek to elicit their employees' cooperation, but only some do it successfully.
71. Cf. Alchian, supra note 60, at 35 (discussing rents from successful team assembly).
72. Other external means of increasing the perception of trustworthiness online include mergers, alliance, and other ways of associating new companies with old and trustworthy names.