What’s trust really worth? Turns out a lot

When to trust, and when to put it in writing. This is a huge question in behavioral economics and it's core to Frank. Today we take a deeper look at one legendary and amazingly simple finding — trust begets trustworthiness.


Who do we trust, and with what?

Trust is fascinating. Everyone trusts and mistrusts all the time.

For example, I lock my door every time I leave the house, but I don't write up a contract when my neighbor borrows my lawn mower.

Maybe that's cause I trust friends but not strangers, but should I trust friends of friends? What about trusting friends with really high stakes? What about trusting old friends vs new ones?

Turns out we have limited intuition in these gray areas of trust.

We're not sure when we can trust, and further, how we can build trust. Lots of awkward interactions and hurt feeling can be traced back to people not knowing what to do in the 'trust grey area'.

What does behavioral science say?

Behavioral economists and behavioral psychologists have been researching these related questions for the better part of three decades.

Some obvious things have popped out — you can trust people closer to you, you can trust people you will interact with later, and so on — but some provocative truths have revealed themselves too.

Today let's look at the seminal paper on my favorite result:

What's a great way to get someone to act untrustworthy? Tell them you don't trust them.

Armin Falk and Michael Kosfeld provided the first evidence of this hypothesis in "The Hidden Costs of Control".

First things first — for potential skeptics — this isn't just an idiosyncratic favorite of Frank, it's a well documented phenomenon.

  • It's in the American Economic Review — a top-three journal
  • It's been cited over 700 times (The typical Nobel laureate has one or two papers total cited over 1,000 times).
  • It's been replicated many times (here and here are two good examples, and here they even show a similar result using CEOs).

Basically, it's a legend of a paper.

The Game: Do you trust me?

Like most papers that provide the first evidence of a hypothesis (a "proof of concept"), the power of the paper is in its simplicity.

Falk and Kosfeld invent a simple game for people to play:

You have $12 that you have to decide how to split between you and me. Every dollar you pass to me turns into $2 that I get to keep. The end. But, here's the twist: before you decide how much to send my way, I can make you send me at least $2. I have the option to control your behavior and guarantee myself $2.

How would you feel if you were just told the other guy is making you send at least $2? What would you do? You send exactly $2 and not a halfpenny more, right?

But what if the recipient had played to your better half? Had the recipient trusted you to act generously and said 'pay whatever', you might've sent $4 (so you both make $8)?

The Result: A trust signal makes people act more trustworthy

This is exactly what Falk and Kosfeld find. When the Principal (i.e., me) controls (i.e., requires a minimum) the average and median amounts they get goes down, especially if the required minimum is relatively low.

Put more bluntly: When the other guy signals mistrust, you reciprocate accordingly. People are not trustworthy if they are not trusted.

Actually, let's put a rosier spin on the finding: People are more trustworthy when they are trusted. Trust can beget trustworthiness, even with strangers.

Now that might sound crazy. I'm probably not going to turn down control in many situations, and neither are you.

But think about how you felt when the other guy was forcing you to send $2. That's a very real feeling. We should avoid instilling that in others. This is probably why I don't write up a contract with my neighbor (who really should buy his own lawnmower by now), but it's also worth considering more broadly.

It's the reason Frank works without the heavy and asymmetrical contracts and negotiated interest rates that banks have. Trust begets trustworthiness. Letting borrowers decide the interest rate begets better behavior that forcing one on them. And it also reduces the awkwardness.

Trust me.

— —

Lucas Coffman, Frank

Lucas is a professor of behavioral economics at Harvard University and the Chief Behavioral Officer at Frank

www.HiFrank.com

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