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Trust - how it's built, and when it falls apart

1. In general, we are quite trusting. And once we trust something, we no longer notice it much.
 

Are we generally trusting or suspicious of others? Well, think about your daily life, and how much of it is only possible because you trust someone to do something, even with they were strangers.
 

You eat at a restaurant with food cooked by a stranger. The restaurant trusts you not to run away before you pay your bill. We leave our cars with valets and the car wash. We leave our kids with caretakers. We trust the strangers who built escalators and lifts and who fly airplanes and drive trains that they did a good job. For almost 2 decades, we gave our credit card information, including the security code to businesses online. These days, we share homes and transportation on platforms like Airbnb, Uber, and  Couchsurfing. We trust a lot of the news we read. Then there is The Trust Game, where people are shown to generally trust strangers, and the curious case of Bernie Madoff who duped some of the smartest in the world and was only exposed by accident.  

In general, life would be pretty painful if we didn't trust most of the time. Obviously we don't trust all the time, but if there are no obvious alarm bells, we tend to trust others more than distrust them. 

And trust is very useful for society. It helps make everyone better off. Let's take a look at an example

2. The value of trust - the Public Goods Game

The Public Goods Game is a very popular experiment. Let's run through this quickly.

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There are 10 participants in the Public Goods Game. Each participant is given $10 at the start of the day and has 2 options with what to do with the money:

  • Option 1: Keep it

  • Option 2: Contribute to the common pool

At the end of the day, all the money contributed to the common pool is multiplied by 5. The multiplied amount is then equally distributed back to each participant. If every participant contributes $10, the total amount in the pot is now 10 participants x $10 x 5 = $500. When equally distributed back, each participant receives $50

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Sooner or later, one participant figures (or maybe innocently tries) out​ not contributing to the daily pot.

What happens?

The amount in the daily pot drops to 9 participants x $10 x 5 = $450. So each participant gets $45. Everyone receives a little less. Except, of course, the participant who didn't contribute. He/she has his original $10 + the $45 from the pool and ends up with $55 - the highest possible amount in the game. 

Then what happens?

  • Every other participant realised that they have been cheated by that one participant, because they only received $45. 

  • This leads to a rapid drop in the number of people contributing to the pot. Inevitably, after a few days, no one contributes any more. 

  • If no one contributes, everyone ends up with only $10. 

  • Sometime after it falls to zero, a few participants will occasionally try to go back to contributing. 

  • Consider this. Even if just 3 people were to contribute to the pot ($30 x 5 = $150; $150/10 = $15), everyone will receive more than $10. 

  • But as soon as participants realise not everyone is contributing to the pot, they stop contributing even though it takes just 3 people contributing for everyone to get more than the original $10. 

3 important takeaways:
 

  1. The game starts with everyone trusting everyone else to contribute equally so that everyone receives a fair reward. When trust exists, everyone is better off. 
     

  2. But when trust is broken even once, the fall in the level of trust is very rapid. From the initial steady-state where 10 people contribute to the common pot, one breach of trust causes a fall to the new steady-state of 0. Broken trust leaves everyone worse off. Instead of receiving $50 a day, everyone receives just $10. 
     

  3. Broken trust is very difficult to repair. Participants become more concerned with relative contribution rather than absolute returns.  By contributing, participants are very likely to receive a bigger sum of money. But they would choose not to do so because they didn't want to be the one contributing while others simply reaped the rewards*. 

* Those familiar with economics will recognise the elements of prisoners' dilemma, tragedy of the commons, and free-ridership in the Public Goods Game.
 

Think about how these takeaways are also applicable in real life.

 

When trust exists, everyone is better off, and when it is broken, everyone is worse off. For example, in a community where there is zero theft, everyone can save money locks, and we can freely leave our stuff around without worry. Shops can reduce the number of employees, and cost-savings can be translated to lower prices for everyone.

 

At a personal level, imagine working with people you trust completely. You never need to waste any effort or time to check on others or suffer the emotional weariness of putting on a guard. You can truly cooperate, and feel better doing so.

So how can we build trust once it is broken? 

Building Trust - I am obviously thinking for your interests

Imagine one day you are at the restaurant with a few friends. And you call the waiter over to order. 

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And the waiter gives you information that you didn't have previously - the duck isn't very good today. Instead, he recommends you something "better and cheaper". Now imagine a second scenario.

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Again, the waiter gives you information that you didn't have previously - the duck isn't very good today. But this time, he recommends something more expensive, the wagyu beef. 

 

Would you trust the waiter more in the first scenario or the second scenario? Arguably, in both scenarios, the waiter is doing exactly the same thing. He informs you (when he did not need to) why your current choice is not very good. Then, he recommends something better. 

 

But almost every one of us would trust the waiter in the first scenario more. Why?

 

In the first scenario, it is obvious that the waiter is thinking for you. He recommends you something better and cheaper when it is in his interest not to do so. 

 

In the second scenario, it is not obvious that the waiter is thinking completely for you. He might very well be right. The beef could be the best recommendation he could give; it might even be the best beef you ever had! But even when you're eating the beef, you can't help but wonder - was he recommending the beef only because it was better, or also because it was more expensive (and since the tip = 20% of the bill, he gets a larger tip)

 

To earn someone's trust, it's useful to make it obvious that you are thinking for them, rather than for yourself. It's why we particularly trust people who take their time or money to do something for us, even when they can't get anything in return. Take the Public Goods Game above for example. Imagine if everyone is no longer contributing to the pool. And then suddenly, one participant contributes continuously, no matter what. He ends up with only $5, while everyone else gets $15. Would you trust this participant if you knew who he/she is?

 

A similar case could be made when I buy someone a gift I clearly dislike. For example, I still cannot why anyone would one a bouquet of flowers. To me, flowers have no aesthetic value. In fact, I think flowers have negative value - you have to carry the bouquet around, and then spend time keeping it alive for just a few more days until it inevitably wilts. What a waste of time. 

But if I bought flowers for a girlfriend, and she knows how much I dislike flowers, she is more likely to appreciate it. If I had pissed her off a lot, the flowers help in mending the relationship and rebuilding trust. In fact, some behavioural scientists argue that the diamond ring, which if you think about it has no practical purpose, is an example of earning trust. Males tend not to find diamonds attractive, which might be one of the reasons why females want males to buy them diamonds - it proves that the males really care. 

 

Creating a trusting system

In the example above, we discussed one way to rebuild trust at a personal level. But is it possible to create a system of trust at a larger level?

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Think of a normal insurance process. When making a claim, we tend to exaggerate at least a little bit. Why? Because we know that the insurance company is trying to pay out as little as possible, and will be extra stringent. But the insurance company also knows this. They know that policyholders would want to claim as much as possible. So insurance companies introduce friction, making the claims process more painful to counteract the probable exaggeration.

Each side doesn't trust the other and tries to guard against the other. This causes both parties to be worse off. The insurance company needs to hire (and pay) more employees to guard against policyholders, which in turn causes premium prices to rise. 

 

Lemonade Insurance Company developed a new model which aims to eliminate this distrust.

 

First, they turned the process from a 2 party contract to a 3 party contract. Policyholders picked charities that they really support. If there is money remaining after paying out insurance claims, this remainder goes to the charities. So if the policy-owners cheat, they are in effect cheating the charity they support.

 

Second, Lemonade introduced transparency. They specified the exact amount - 20% of premiums - that they would pocket as a fee to run the insurance policy. So Lemonade removed themselves from a conflict of interest; they are indifferent to how claims are paid out as it doesn't affect them. 

 

So what did Leomande Insurance observe after they introduced this new process of insurance claims? Amazingly, they received something which normal insurance companies never receive: a confession of erroneous insurance claims. For example, policyholders wrote in to explain that they had reported a loss of laptop in their insurance claims after their house was burgled. They then explained that they had merely just misplaced the laptop, and now having found it, wanted to return the extra claimed amount. 

In this piece, we've covered how the presence of trust creates benefits for everyone involved. Conversely, the absence of trust creates costs that makes everyone worse off. As the behavioural scientist Dan Ariely shares, "If you create a system that encourages trust, reduces conflicts of interest, and trust that people will be kind, there's a good chance that trust will be the response."

 

Imagine you had to design a system for your organisation that encourages trust. How would you do it?

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