Trust makes the world go round. The latter holds true not just in personal relationships but society at large. In this week’s reading recommendation, Benjamin Ho reveals the importance of trust in our day-to-day lives as citizens, consumers, employees and leaders.
While you might think the subject of trust more apt for a book about law or sociology, professor Benjamin Ho proves that looking at economic issues through the perspective of trust is both informative and thought-provoking. Much of economic study tends to focus on theoretical efficiency, but Ho’s emphasis on trust, in contrast, offers a more rounded, real-world view. His commentary is illuminating and useful for anyone concerned about the destructive levels of mistrust so prevalent in contemporary society.
- The ability to trust strangers is the mark of a successful developed economy.
- Throughout history, institutions were created to build trust.
- Companies, jobs, brands and online platforms all confront trust issues.
- A monetary system relies on confidence, and financial crises reveal what happens when trust is lacking.
- Contracts can help increase trust, but they also remove the opportunity to show trust.
- Greater access to information has led to more partisanship and less trust in politicians with opposing views.
- Confidence in the US medical profession has declined, as many people seek online information that conforms to their opinions.
- Apologies can restore trust in a relationship.
- Challenges like climate change require humans to trust each other on a global scale.
The ability to trust strangers is the mark of a successful developed economy.
The common economic unit of ancient humans was the small communal tribe. Traditional tribes operated informally and allocated tasks and benefits through mutual favors. These communities were groups of families large enough to cooperate for jobs like hunting and self-defense, but small enough that every individual or family could manage the complex web of favors and obligations required to keep such a group harmonious. For a community this small, informal gossip networks played a large role in encouraging individuals to be trustworthy. Studies about communal living reveal that 150 seems to be the maximum number of people with whom any one person can maintain relationships. This number crops up in diverse areas of human interplay: It’s the size of tribes before they break up, the number of troops within military units since Roman times and the typical number of Facebook friends with whom users regularly interact.
“The gift economy originated as a system based on keeping track of favors and knowing at any moment who owed you and whom you owed…our brain can manage around 150 of these accounts before our ledger gets too full.”
The leap toward economic development required specialization and demanded institutions that allowed a community to avoid having to know personally all the other individuals involved in its economic transactions. Research shows that people who are part of communal, hunter-gatherer-type societies are actually less trusting than people in more developed, modern societies. Community-based cultures rely on face-to-face relationships operating within a cycle of mutual faith and reciprocity. These individuals are not used to trusting strangers, which more developed economies’ institutions and markets allow and encourage.
Throughout history, institutions were created to build trust.
Religion was the original institution that allowed individuals to widen the circle of people they trusted. Having a population that believes a deity is watching them, ready to judge and punish them, is a good way to increase trust and trustworthiness in a society. One study claimed that the belief in a punitive god, with an emphasis on concepts like hell, is linked to higher economic growth rates. Shared values and rules also help build trust by creating “in” and “out” groups, which bond people together. This functional view of religion recognizes its capacity to increase trust and to convert that trust into prosperity. Evidence of that connection lies in the impressive buildings and monuments that religions have sponsored through the centuries.
“The medieval worldview was often bleak, and life expectancies were short. The idea of an eternal soul gave people hope and reason to care about and plan for the future. By extending our hope for the future, religious belief increased people’s trustworthiness, which also expanded our willingness to trust.”
Some evocative and instructive examples of trust-building institutions were the medieval trade fairs held in the Champagne region of France, where 12th- and 13th-century merchants met and traded. Because it was unsafe for vendors to carry around large amounts of gold, they developed a system of accounts based on trust and reputation. Given most countries’ inability then to enforce private contracts, these merchants employed their own judges. The judges could blacklist sellers who behaved badly. Both the merchants and the judges worked within a system that depended on character and confidence.
“Modern institutions did require people to reorient our thinking from particular to anonymous exchanges. The big change that arose was from trusting only people in your own tribe, however broadly construed, to trusting anonymous rules and institutions.”
Medieval trade guilds also increased trust. Poor-quality goods or the underhanded behavior of a member would tarnish the whole guild and so motivated the guild to police itself. As a result, guilds and the cities they worked in set high standards for membership and participation, and they forced people to take those standards seriously. The barriers, sacrifices, commitments, rituals, rules and enforcement involved in joining these institutions all helped build trust.
Companies, jobs, brands and online platforms all confront trust issues.
In the same way that religions and medieval trade guilds allowed groups to emerge as trustworthy entities and thus break through the cognitive limit of 150 people, so, too, do modern companies and brands. People believe that a firm values its reputation so much that it will prescribe and enforce behavioral norms for its employees, which allows society to trust it and its products and services. Employees know that an undisciplined company would have poor prospects. An effective business structure helps workers believe that everyone else is doing their share.
“In a large organization with a broad diffusion of responsibility, it is tempting and easy for one individual to free-ride on the efforts of others, not putting in any effort themselves.…Therefore, corporations adopt rituals and stories to inculcate norms and expectations.”
Trust has an effect on the structure of companies and on where their outer borders lie. For example, if one firm is overly reliant on a single supplier, concerns over risk and trust may mean consolidation – or a buyout – solves the problem and provides security. Similarly, companies are made up of people performing tasks that are hard to manage on a piecework basis, so trusting relationships based on salaries and job expectations are formed in-house. However, online platform technologies can reduce the need for in-house employment, resulting in more remote and gig economy work. Many of the platform-type businesses simply provide new ways to achieve greater trust between strangers by using online customer feedback. This can act as a modern form of village gossip, creating a cost for bad behavior.
A monetary system relies heavily on confidence, and financial crises reveal what happens when trust is lacking.
Trust in money is crucial: After all, modern money is just paper propped up by an expectation that central banks will maintain its value and scarcity. Because of that trust, banks only keep a fraction of their liabilities on hand in cash. Interest rates charged on loans have a trust or risk component as well. Money is a precise way to measure economic activity, but in all other ways, “money is an act of faith.” Financial crises such as the 2008 meltdown demonstrate what happens when actors in the financial system no longer have faith in the soundness of some financial assets or in the liquidity prospects of certain financial trading partners.
“In most modern democracies, it has been decided that we can’t trust the people in power to control the supply of money. Actually, a better version of that statement is that everyone, including the people in power, is better off if elected officials do not have direct control over the money supply.”
History is replete with examples of kings and queens who were unable to levy taxes, or to borrow or print money, without an institutional safeguard. Today, independent central banks inject social trust into the system, which produces better outcomes for all. Cryptocurrencies like bitcoin are defined through their crucial attribute of manufacturing trust through encrypted blockchain ledger technology. Other business applications in which digital trust is required, such as e-commerce and the sharing economy, are discovering blockchain. Such 21st-century innovations are designed to overcome institutional mistrust.
Contracts can help increase trust, but they also remove the opportunity to show trust.
Parties enjoy trust when they have a clearly defined contract between them that specifies agreed-on obligations, rights and expectations. Creating that confidence through a contract implies that trusting someone is always a little risky. Indeed, when you acknowledge risk, you make yourself vulnerable and people are more likely to trust you. When you reduce the opportunities for someone to show they are trustworthy, you can hinder or “crowd-out” trusting relationships. Keeping contracts incomplete and a matter of trust can let people live up to that trust. Rigorous monitoring or explicitly spelling out a contractual minimum can perversely suggest to partners that they are not trusted – and encourage them to abide by lower standards.
Greater access to information has led to more partisanship and less trust in politicians with opposing views.
Media outlets understand that it’s in their interest to provide the content that their readers and viewers want, and that if that content matches the audience’s existing political views, people will consider the provider more trustworthy. The echo chamber created by social media also makes individuals overly confident in their own views and biases, and more intolerant and distrustful of politicians who disagree with them. Indeed, access to social media’s information stream often leads users to be skeptical of people with specialized expertise and knowledge.
“Access to more information and more education means that we may become overconfident in our own perceptions, valuing them more highly than the perceptions of experts…The internet has given us greater means to find ‘our tribe’.”
A strong political system and unbiased law enforcement is crucial for a society that operates with a high level of trust, because bad actions are punished and power is less likely to be abused. Political issues that demand specialized understanding require that citizens have faith in their elected officials to act as judicious decision-making representatives; voters must be confident that elected officials won’t seek only to reflect or conform to popular opinion. That explains why there is so much emphasis on whether politicians appear trustworthy and whether they share the electorate’s values.
“The line that I remember most from my own studies in political science is that the most important indicator of the strength of a democracy is not the set of things that people vote on, but instead the set of things that people are not allowed to vote on.”
Political scientists have studied how to allocate decision making between elected politicians and nonelected officials: It is overall better to appoint bureaucrats to handle an issue when citizens are poorly informed about that issue, when acquiring that information is costly and when feedback on whether the right decision has been made is slow. Officials who are not accountable to voters can also insulate minority interests against the majority. For example, in the United States, Supreme Court justices and Federal Reserve chairs don’t need to take broader public opinion into consideration in their rulings and decisions. They are not elected, and their independence is important. On the other hand, the discretion of nonelected officials should be more limited than that of electorally accountable representatives, especially when decisions have consequences on people’s lives.
Trust in the US medical profession has declined, as many people seek online information that conforms to their opinions.
As in politics, the availability of online information has resulted in individuals being able to confirm what they want to believe or what feeds their worst fears. There are examples of Americans searching for doctors who share their opinions or who will prescribe whatever drug or treatment the patient desires. Studies show that US health care costs could be cut by 3% to 10% if patients trusted and followed their physicians’ advice.
“This problem is often exacerbated by science journalism. Headlines need to be attention-grabbing, and they leave little room for uncertainty and nuance.”
Laws that force doctors to disclose payments from drug companies aim to increase trust by improving transparency and information. Often, medical science papers with sensational findings feed fears, whereas undramatic studies or those that reveal unfashionable results aren’t published.
Apologies can restore trust in a relationship.
Apologies can help individuals trying to re-establish trust in a relationship by signaling that they recognize that what they are apologizing for shouldn’t have happened. Apologies are more important early in relationships, when trust has not yet been established. Gifts can help raise trust; the understanding demonstrated by choosing the right gift strengthens relationships.
“Part of what makes apologies effective is that they can backfire. This also makes apologizing hard. That’s good, because the harder the apology is to make, the more effective it is.”
Apologies have become an issue in the US medical sector: Doctors are afraid to make apologies, as they may have legal implications. For this reason, many US states prohibit physicians’ apologies from being used in court as evidence.
“One of the paradoxes of apologies is that while we want people to apologize when they have wronged us and apologies are often the road to forgiveness and a rebuilding of trust, our first response to someone who apologizes is often to punish them further.”
A study was devised using the testimony President Bill Clinton gave in response to the Monica Lewinsky controversy in the 2000s. Two groups were shown different versions of Clinton’s response: one edited to emphasize an apologetic tone, and the other with an angry and defiant tone. The former video made the study subjects like Clinton more but less apt to vote for him, compared to the second group. The people who saw him as angry and unapologetic viewed him as a better president. Even an implied apology can bring people closer together. Yet apologies are emotionally and politically complicated.
Challenges like climate change require humans to trust each other on a global scale.
Tackling the problem of climate change will demand not only greater faith in experts but also more trust and cooperation among all the world’s countries. People must also consider future generations.
“By making emissions visible, the Paris Climate Agreement will create accountability – accountability between each country’s policy makers and their constituents, and accountability between countries.”
Some critics view the Paris Climate Agreement as toothless because it lacks specific, binding targets. But it’s an effective mechanism for establishing norms and building trust. It emphasizes common goals, promises ambitious cuts to emissions, and offers ways to measure and participate in a “global stocktake.” Because sovereign countries can’t force one another to take action, prioritizing visibility, responsibility, and a nation’s desire for reputation and trustworthiness may have been a wise approach after all.
About the author
Benjamin Ho is an associate professor of behavioral economics at Vassar College and a faculty affiliate at the center for Global Energy Policy at Columbia University. He was also lead energy economist for the White House Council of Economic Advisers.
Economic Theory, Business, Economics, Economic Theory and Schools of Thought
Table of Contents
1. Economics of Trust
2. The History of Trust
3. Trust in the Modern Economy
4. Trusting Institutions with Expertise
5. Trusting One Another
Benjamin Ho reveals the surprising importance of trust to how we understand our day-to-day economic lives. Starting with the earliest societies and proceeding through the evolution of the modern economy, he explores its role across an astonishing range of institutions and practices.
Have economists neglected trust? The economy is fundamentally a network of relationships built on mutual expectations. More than that, trust is the glue that holds civilization together. Every time we interact with another person—to make a purchase, work on a project, or share a living space—we rely on trust. Institutions and relationships function because people place confidence in them. Retailers seek to become trusted brands; employers put their trust in their employees; and democracy works only when we trust our government.
Benjamin Ho reveals the surprising importance of trust to how we understand our day-to-day economic lives. Starting with the earliest societies and proceeding through the evolution of the modern economy, he explores its role across an astonishing range of institutions and practices. From contracts and banking to blockchain and the sharing economy to health care and climate change, Ho shows how trust shapes the workings of the world. He provides an accessible account of how economists have applied the mathematical tools of game theory and the experimental methods of behavioral economics to bring rigor to understanding trust. Bringing together insights from decades of research in an approachable format, Why Trust Matters shows how a concept that we rarely associate with the discipline of economics is central to the social systems that govern our lives.
Illustrating how a seemingly noneconomic concept is, in fact, at the heart of many fundamental economic concepts, Why Trust Matters looks back in history to develop the idea that trust undergirds most human interactions. Ho has written a timely, interesting, and fun work for specialists and nonspecialists alike. — Charles J. Wheelan, author of Naked Economics: Undressing the Dismal Science
Benjamin Ho writes about one of the most important and underexplored factors in how well society functions: trust. Why Trust Matters is clear, engaging, and persuasive: trust me! — Seth Stephens-Davidowitz, author of Everybody Lies: Big Data, New Data, and What the Internet Can Tell Us About Who We Really Are
This blurb is an act of trust between you, the potential buyer, and me, the esteemed writer who risked his literary reputation to endorse this book. I do so with no fear. Mostly because Benjamin Ho has written a great, necessary, fun, hopeful book that makes you rethink the very basics of society and partly because my rep isn’t all that great. — Joel Stein, author of In Defense of Elitism: Why I’m Better Than You and You’re Better Than Someone Who Didn’t Buy This Book
Why Trust Matters validates my long-standing membership in the Ben Ho fan club. His deep knowledge of the historical record, his careful application of economic reasoning, and his charm shine through on every page of this highly readable account of the role of trust in economic and social life. — Robert H. Frank, author of Under the Influence: Putting Peer Pressure to Work
Trust is critical to civilization and its economy. Benjamin Ho provides a concise, sweeping, accessible, and fascinating summary of the different aspects of trust and their effect on a broad set of social institutions. Whether you are a seasoned economist seeking to broaden your knowledge of the field, a student beginning your journey, or a casual reader looking to deepen your understanding of the world, trust me, you will find this book invaluable. — Ed Conard, author of Unintended Consequences: Why Everything You’ve Been Told About the Economy Is Wrong
Ho steps away from the mathematical formalisms of his subfield and writes lucidly and compellingly about the foundational concept of all social science. ― New Yorker
A great interdisciplinary dive into how trust works, and how we might harness it to help the economy grow. — John Authers ― Bloomberg
Highly recommended. ― Midwest Book Review