In episode 69, we dive into the fascinating world of trust and cooperation in economics with economist, Professor Benjamin Ho, an expert in behavioral economics and game theory and author of the book “Why Trust Matters”. Benjamin explains that economic theory, particularly game theory, offers insights into trust.
He discusses how repeated games demonstrate how reputation, history of interactions, and patience affect cooperative behavior. Risk and vulnerability play crucial roles in building trust, and social signaling, akin to peacocks’ feathers, helps demonstrate trustworthiness. Benjamin’s research on apologies explores how they serve as signals of trustworthiness, employing mathematical principles like Bayes’ rule.
The interviewee highlights the puzzle economists faced in explaining cooperation and altruism. While these behaviors seemed natural to others, economic theory struggled to account for them. Experimental data and observations reveal that most people are inherently cooperative, with the exception of economists who are trained to be more self-interested. Human instinct favors cooperation due to millennia of evolution. Benjamin mentions a book by Robert Frank, suggesting the use of the baseline economic model to understand the importance of cooperation and its relation to evolutionary fitness. Cooperation, fairness, and altruism are inherent in human nature, explaining their prevalence in society.
The interviewee delves into the trust dilemma faced by early hunter-gatherer societies, highlighting the need to share resources and identify trustworthy individuals who would reciprocate in the future. Accounting and record-keeping systems emerged as early solutions to track obligations and debts. Language and speech also played a role in assessing trustworthiness. As cooperation expanded beyond small communities, religions, and legal systems emerged to establish rules and rituals that facilitated trust and cooperation among larger social groups.
The complexities of apologies are explored, emphasizing the importance of apologies being accompanied by a cost or commitment. An experiment conducted with Uber reveals that a simple apology is often perceived as cheap while offering a $5 coupon or a promise to do better proves more effective. The interviewee demonstrates that effective apologies must carry a proportional cost or commitment.
The interviewee discusses an experiment involving Bill Clinton’s apologies after the Monica Lewinsky scandal. The results reveal that those who saw an apologetic Clinton liked him more and perceived him as warmer, while those who saw an angry Clinton respected him more and viewed him as more competent. This highlights the potential trade-offs of apologies, as they can increase likability but may come at the cost of losing respect and authority, which is crucial for politicians.
In cooperative dilemmas like climate change, individual incentives often conflict with collective well-being. Game theory suggests two approaches to address this: coercion and trust. Coercion is impractical at the international level, making trust crucial. Trust and fairness govern human cooperation, applying to countries in treaties and agreements. The Paris Climate Accords adopted a unique approach, emphasizing transparency to create trust, accountability, and positive behaviors. This new approach focuses on relationships and trust rather than punishment and rules.
The interviewee emphasizes that it’s not just the words we use but the cost associated with them that matters in trust-building. Apologies, for example, can be categorized based on their cost. Cheap apologies, such as empathy or excuses, are ineffective. Costly apologies, such as promises or admissions of fallibility, are more effective in restoring trust. The words we use shape the cost and implications of our apologies, influencing how they are perceived and how trust is rebuilt.
The relationship between trust and contract enforcement is examined from two perspectives. On a macro-historical level, trust and contract enforcement tend to go hand in hand. Countries or societies with high trust also have strong rule of law and contract enforcement. However, experimental studies reveal that an excessive number of rules in contracts can hinder trust-building. When contracts become overly restrictive, they limit vulnerability and the opportunity to take risks on others, reducing the chance to build trust.
Lastly, the importance of trust is emphasized. Despite its pervasive presence in our daily lives, trust is often neglected in educational curricula and discussions. This is especially significant in economic development, as the absence of trusted institutions contributes to poverty and underdevelopment. Institutions like the rule of law, religion, and social norms are fundamental for proper economic transactions. Contrary to the perception of capitalism as impersonal, anthropological studies show that capitalist economies often exhibit high levels of trust. Establishing trust-building mechanisms is crucial when establishing new institutions for poverty alleviation and economic development. Without trust, the effectiveness of any economic endeavor is compromised.
My book is thinking about risk and vulnerability, that it’s funny that we think of risk as a bad thing, but one thing that my book shows is that risk is also an essential ingredient to creating trust. If we basically don’t have any risk, if we don’t have any chance of being vulnerable with somebody else, then we don’t have the chance to demonstrate how trustworthy we are and trust is harder to build. And then the final contribution, I think from economic theory to understanding trust is something from statistics which is called Bayes rule. In economics and biology, we have these ideas of social signaling. I think the easiest way to think about signaling is thinking about peacocks, right? So everybody knows that peacocks grow these very elaborate tail feathers to sort of demonstrate their evolutionary fitness. So economists have taken that idea to think about how other people signal using different mechanisms to demonstrate something about themselves. I’m very much interested in how people demonstrate their trustworthiness, and my research into apologies is basically thinking about how apologies serve as a signal of your trustworthiness and how we can use mathematics of Bayes rule and probability and statistics to basically understand how those signals work.
(…) a really fascinating example of this phenomenon, too, of how an apology only works if it is costly. Think this is one of my favorite experiments, this is actually by one of my professors who is at Stanford Business School when I was a PhD student and this is by Laura Tiedens. And what she did was she conducted this experiment near the end of the Bill Clinton administration. Bill Clinton, if you recall, was involved in these sex scandals with an intern at the White House. And there was a big call for Bill Clinton to apologize for these scandals with Monica Lewinsky. At the time, it was often remarked upon that Clinton never did it. Why didn’t he just say I’m sorry?
These are three easy words. And one of my papers, I quote Elton John, who has a song, “Sorry, is the Hardest Word” or something to those effects. It turns out that saying am sorry is hard and this experiment by Tiedens helps document why. And so what Tiedens did was she basically took video clips of Clinton and she made two different videos, one video he sounded apologetic for the whole Monica Lewinsky scandal. The other he just sounded angry. He basically sounded like, why are you accusing me of such things? And she showed these two videos to two groups of subjects. And it turns out that people that saw apologetic Clinton, they were happy, he apologized. They liked him more. They found him to be a nicer person, a more warm person. But the thing is that people that saw angry Clinton respected him more. They found him to be more competent. And most important for politicians, people that saw angry Clinton were more likely to support him for president again. So there’s this idea that if you apologize, I might like you more, but then I respect you less and I’m less likely to vote for you. Whereas if you are just angry, it turns out that people respect you more. So people maybe think you’re a less nice person, but oftentimes we’re not looking for niceness in our politicians. We’re looking for competence. We’re looking for authority. This lesson was well understood. I think at Clinton’s time we saw that Clinton never apologized. I actually started a lot of my research looking at examples like Silvio Berlusconi, who also famously never apologized. And we see politicians today who famously never apologized. And this experiment shows why, that apologies have a cost. That cost comes in lost authority, lost respect, lost belief in your competence, the benefit of that cost, the reason that it’s good that apologies come with this cost is because it does make people like you more, that when you apologize and you’re willing to pay that cost, then we see that people sort of like you more.
The Book “Why Trust Matters, An Economist’s Guide to the Ties that Bind Us”.
(…) But modern economists have largely ceded the study of trust to other disciplines, like anthropology, sociology, political science, and psychology. Now, in “Why Trust Matters” (Columbia), Benjamin Ho, a professor of economics at Vassar College, aims to resuscitate it within his field. He traces his zeal for modeling human behavior to a childhood fascination with Hari Seldon, the mathematician protagonist of Isaac Asimov’s “Foundation” series, who tries to save civilization using “psychohistory,” a set of equations allowing farsighted sociological forecasting. (Paul Krugman admits a similar inspiration.) So it makes sense that, as a graduate student, Ho was drawn to behavioral economics, a primitive step toward the immense aspirations of Seldonian science. Ho wrote his dissertation on the microeconomics of apologies. (Apologies, he found, have to be costly to be effective.) In “Why Trust Matters,” Ho steps away from the mathematical formalisms of his subfield and writes lucidly and compellingly about the foundational concept of all social science. One could tell the story of human civilization as a story of how we learned to trust one another,” Ho writes.
“We learned first to share the spoils of a group hunt instead of hunting and eating (or not eating) alone.” He cites the British evolutionary psychologist Robin Dunbar, who noticed that natural community size for primates seemed directly related to brain size—the greater the relative size of the neocortex, the larger the tribe. For large-brained Homo sapiens, the predicted maximal group size, also called Dunbar’s number, was a hundred and fifty. (The number, Dunbar says, recurs in the estimated average sizes of the Bronze Age communities that built stone circles, of Anglo-Saxon villages listed in the Domesday Book, and of contemporary Facebook communities.) The concept has its critics, but the basic idea—that there are probably capacity constraints on the number of personal connections we can make with our fellow-humans—seems hard to dispute. How, then, did societies evolve to the point where people felt some commonality with thousands, millions, and, eventually, billions of other people?
Our essential innovation was a simple one: forming groups—in-groups and out-groups—that could ramp up far beyond our small bands. As Ho writes, tribes became villages, which became towns, city-states, nations; through elastic social identities, we found ways of sustaining tribal affiliations at large scale. You could trade with someone from your tribe even if you didn’t know them, although our greater trust and loyalty toward the in-group meant greater distrust and hostility toward the out-group. Religion proved to be an especially powerful social glue, providing common purpose, mutual protection, and a modicum of alms distribution, often enforced by the idea of retributive deities and their earthly emissaries (…)
Book details: 336 pages, published June 29, 2021, by Columbia University Press, ISBN 9780231189606 (ISBN10: 0231189605), English Language