“To be trusted is a greater compliment than being loved.” ~ George MacDonald
Trust is an important element in the working of not only businesses and markets but the entire world. From electronic payments to giving loans – everything relies on the essential element of trust. As a matter of fact, fiat currency functions inherently on trust. Paper money has no value of its own but it still works because we DECIDE it has value. We keep faith that it will be accepted in exchange for essential things.
While it is common knowledge that things would be smoother if everyone just trusts everyone else, a number of factors stop us from having faith. Thus the question arises, why is it so hard to trust? The basic explanation lies in the fact that it is a temporal issue. The person who makes the initial move, the truster, makes a sacrifice by doing something at the risk of his own interests. There is time involved until he gets to know whether his doing brought out some good to him or not.
Trust through Game Theory
Game Theory explores the play of trust through trust games. The Trust Game is an extensive form game. This class of games allows to incorporate non-simultaneous play, and in particular reactions to previous actions of other agents. The simplest examples, where all actions are observable, include paradigms which have been intensively used in behavioral game theory to investigate prosocial behavior, i.e., deviations from selfishness.
An initial attempt to understand the nuances of trust can be credited to Kreps who invented a Trust Game in 1990. In this game, there is a trustor, the first agent who shows the initial trust by giving out money and there is a trustee, who is the second agent who receives this amount. The trustor has the binary choice to trust the trustee or not, with payoffs of $0 for both players if no trust is shown. In case the trustor decides to trust, the trustee faces a binary choice to either honour it, leading to equal payoffs of $10 for each player, orabuse the demonstrated trust, resulting in a payoff of $15 for the untrustworthy trustee and a negative payoff of −$5 for the unhappy trustor.
The game shares four crucial features, which were put forward by Coleman (1990) to define a trust situation.
- The trustor’s decision to trust is voluntary.
- There is a time lag between the trustor’s and the trustees choices. Hence, revealing it to be a sequential game.
- The possibility for the trustee to abuse or honour the demonstrated trust occurs if and only if the trustor does indeed show trust. Action of one player is dependent on the actions of the other, trust is a two way road.
- In case the trustee decides to (fully) abuse the demonstrated trust, the trustor will be left worse off than if no trust had been shown;that is, the trustor becomes vulnerable by exercising trust. This demonstrates why lack of trust is predominant in our world.
This is also evident in common markets when we see 2 adjacent shops selling the same things. Consider two stationary shops built next to each other. One can’t decrease the price of its product to lure customers as the other will do the same. This will set off a tit for tat game where both shopkeepers suffer loss. Now, if they try to collude by promising to keep the same price, say Rs 10 per pen, one of them might break the promise and lower the price to Rs 8. This price will obviously attract more customers and hence more profit for the shopkeeper who broke the trust. It is due to this reason that such collusions are rare and competition in an oligopoly seethes by non-price strategies.
Non-price strategies are measures taken by sellers which don’t include setting and
changing prices of their product to increase sales. For e.g., a priced strategy would include decreasing the price of the product to lure customers. In an oligopoly, such a price war would ultimately ruin business as explained above. Hence non-price strategies are used (such as advertising, extending customer care facilities, etc.).
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Trust in Today’s World
In today’s time, with an augmentation of urbanisation and industrialisation, we observe that trust among people is dwindling due to which there is a need for new systems and technology which do not depend on ‘mutual trust’. Technologies are continuously evolving, building unbelievable security systems. One such example is the blockchain technology. Blockchain technology provides a way for un-trusted parties to come to agreement on the state of a database, without using a middleman. By providing a ledger that nobody administers, a blockchain could provide specific financial services — like payments, or securitization — without using a middleman, like a bank. Hence, public blockchains cut down on the need for trusted third parties to verify transactions and give people around the world access to fast, cheap, and borderless payments. This is the reason behind the success of Bitcoin.
It is the basic human psychology which is so complex that we are never assured how the other person would react or believe in our truth and ability. Sometimes, we don’t trust somebody because of their past actions and decisions and sometimes because we are strangers to them! Humans are selfish; our ability to trust also depends on how strongly we want to protect our self interests. Breach of trust is not an uncommon phenomenon – which makes us more skeptical about the people around us. A study reveals that we tend to trust someone more if they have something in common with us, like sharing the same interests. For example, people belonging to the same region will rely on each other even if they don’t know each other and happen to meet in a different place.
Additionally, it is more common to see that trust is honoured in a relation which is long term. For example, chances of paying up pending dues are higher at a neighborhood grocery store as compared to a shop in some far off place where the customer will not return. Sociological understanding is that we are more trusting in closed and smaller communities, an example being that of a rural set up compared to modern urban societies.
In conclusion, three things are needed for the evolution of trust.
- Repeat Interactions: The knowledge of the possibility of interactions in future gives one a harbour to cling to.
- Possible Win-Wins: When parties concerned play a non zero sum game, in which both can be better off, the possibility of trusting increases by leaps and bounds.
- Low miscommunication: Communication is key. It pays to understand and forgive once or twice, but when the level of miscommunication is high, trust breaks down very easily.