May
28

The Economics of Trust

Trust

Source: Organization for Economic Cooperation and Development

Did you know that countries with a higher % of trustworthiness do more business and are more prosperous?  For creative self-expression to become productive innovation, trust is essential to build and create more of.

Check out this list of countries to the left and the % of people in 2008 who expressed a high level of trust in each other from different countries. According to 2011 data from the Organization for Economic Cooperation and Development, just less than half of people in the United States expressed a high level of trust in others.

How can we create more trustworthiness? What’s behind the human instinct to trust and to put each others well-being first?
When you think about how much of the world works on a handshake or on holding a door open for somebody, why people cooperate is a huge  important question. Perhaps beginning with the definition of trust would be a good start.

There are a number of different ways we can define trust which include predictability, the exchange of value, delayed reciprocity and exposed vulnerabilities.

Predictability

It is a normal part of the human condition to be constantly forecasting ahead. We build internal models of the world based both on our experiences and what others tell us, and then use these to guess what will happen next. This allows us to spot and prepare for threats and also make plans to achieve our longer-term goals.

As such, the greatest unpredictability exists at 50%. A reliable enemy can be preferable to an unpredictable friend, as at least we know where we are in our relationship with them and what we can expect to have happen.

Definition 1 Trust means being able to predict what other people will do and what situations will occur. If we can surround ourselves with people we trust, then we can create a safe present and an even better future.

Value Exchange

Most of what we do with other people is based around exchange. Exchange is the basis for business as well as simple relationships. At its simplest, it is exchange of goods. I will swap you two sheep for one cow. It is easy to calculate the value in such material bargaining. Things get more complex when less tangible forces come into play.  A parent exchanges attention for love. A company exchanges not only pay but good working conditions for the intellectual and manual efforts of its workforce.

Value exchange works because we each value things differently. If I have a whole flock of sheep but no milk, then I can do business with a person who has a herd of cows but no clothes. This principle of reciprocity is what binds societies together. Trust in value exchange occurs when we do not know fully whether what we are receiving is what is reasonable to expect.

Definition 2 Trust means making an exchange with someone when you do not have full knowledge about them, their intent and the things they are offering to you.

Delayed Reciprocity

Exchange is not just about an immediate swapping of cows and sheep or hugs and kisses. What makes companies and societies really work is that something is given now, but the return is paid back some time in the future. The advantage of this is that we can create a more flexible environment, where you can get what you need when you need it, rather than having to save up for it.

Trust now becomes particularly important, because otherwise we are giving something for nothing. The delay we have placed in the reciprocal arrangement adds a high level of uncertainty which we need to mitigate through trust.

What is often called the ‘golden rule’ is a simple formula for creating trust. ‘Do unto others as you would have them do unto you.’ It sets up the dynamic for my giving you something now with the hope of getting back some unspecified thing in the indeterminate future.

Definition 3  Trust means giving something now with an expectation that it will be repaid at some unspecified time in the future.

Exposed Vulnerabilities

When we trust other people, we may not only be giving them something in hope of getting something else back in the future, we may also be exposing ourselves in a way that they can take advantage of our vulnerabilities. If I buy a car from you and I do not know what a good price for it would be, you can lie to me so you get a better bargain. If I tell you in confidence about the problems I am having with work, you could use this to further your own career at my expense.

Although the threat of retribution or projected feelings of guilt can counteract your temptation to abuse my exposed vulnerabilities, if you succumb I still can get hurt and may still end up with the shorter end of the stick. For our transaction to complete successfully, I must be able to trust that such pain and agony will not come to pass.

Definition 4  Trust means enabling other people to take advantage of your vulnerabilities—but expecting that they will not do this.

Victor W. Hwang and Greg Horowitt in their best selling book The Rainforest: The Secret to Building the Next Silicon Valley argue that free market thinking fails to consider the impact of trust and human nature on the innovation process. The authors argue that highly creative and innovative ecosystems — what they call Rainforests — can unlock human potential when people belong to these “tribes of trust” and follow the Rules of the Rainforest.

The rules of the Rainforest include:

Rule #1: Break rules and dream.

Rule #2: Open doors and listen.

Rule #3: Trust and be trustworthy.

Rule #4: Experiment and iterate together.

Rule #5: Seek fairness, not advantage.

Rule #6: Err, fail, and persist.

Rule #7: Pay it forward.

In their most recent book, The Rainforest Blueprint:  you can learn how to build your own “tribes of trust” for your company, organization or community.

Image credit:messageinabottleblog.wordpress.com

About Lisa Canning

“Vowels are to words what creativity is to the world~ basic and necessary.”

Lisa Canning is the founder of IAEOU, the Institute for Arts Entrepreneurship (IAE) and Entrepreneur the Arts.

What motivates you to explore your creativity? Follow me @EntretheArts

Need a magic creativity wand? Let’s start with the clarinet and see what it inspires you to dream and do.

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