In episode 69, we explore the fascinating world of trust and cooperation in economics with economist Professor Benjamin Ho, author of “Why Trust Matters, An Economist’s Guide to the Ties That Bind Us.” He discusses how game theory offers insights into trust, highlighting the role of reputation, history of interactions, and vulnerability in building trust. He also explores the use of social signaling and mathematical principles in understanding trustworthiness, particularly in relation to apologies using Bayes’ rule. The interview delves into the puzzle economists faced in explaining cooperation and altruism, emphasizing that most people are inherently cooperative, except for economists who are trained to be self-interested. The importance of cooperation, fairness, and altruism in human nature and society is highlighted, drawing from Robert Frank’s book on the baseline economic model.
Early hunter-gatherer societies faced the trust dilemma and developed accounting systems, language, and legal systems to facilitate trust and cooperation as communities expanded.
The complexities of apologies are examined, emphasizing the need for them to carry a cost or commitment to be effective. The experiment involving Bill Clinton’s apologies showcases the trade-offs between likability, respect, and authority for politicians. The cost associated with trust-building, such as in apologies, is emphasized, with costly apologies proving more effective in restoring trust. In cooperative dilemmas like climate change, trust plays a crucial role, as coercion is impractical at the international level. The Paris Climate Accords’ approach of transparency to foster trust, accountability, and positive behaviors is discussed.
The relationship between trust and contract enforcement is explored, noting that while trust and contract enforcement often go hand in hand, excessive rules in contracts can hinder trust-building by limiting vulnerability and risk-taking. The importance of including trust-building mechanisms in economic development is emphasized, as the absence of trusted institutions hinders poverty alleviation and overall progress.
The interview sheds light on the significance of trust in economics, drawing from game theory, behavioral economics, and historical perspectives. It underscores the role of trust in cooperation, apologies, climate change, and contract enforcement, and emphasizes the need to prioritize trust-building in educational curricula and economic development efforts.