Trusted - Economics

Economics

Trust in economics is treated as an explanation for a difference between actual human behaviour and the one that can be explained by the individual desire to maximize one's utility. In economic terms, trust can provide an explanation of a difference between Nash equilibrium and Pareto optimum. Such an approach can be applied to individuals and well as societies.

Trust is also seen as an economic lubricant, reducing the cost of transactions between parties, enabling new forms of cooperation and generally furthering business activities;, employment and prosperity. This observation created a significant interest in considering trust as a form of social capital and has led research into closer understanding of the process of creation and distribution of such capital. It has been claimed that higher level of social trust is positively correlated with economic development. Even though the original concept of 'high trust' and 'low trust' societies may not necessarily hold, it has been widely accepted and demonstrated that social trust benefits the economy and that a low level of trust inhibits economic growth.

Theoretical economical modelling demonstrated that the optimum level of trust that a rational economic agent should exhibit in transactions is equal to trustworthiness of the other party. Such a level of trust leads to efficient market. Trusting less lead to the loss of economic opportunities, trusting more leads to unnecessary vulnerabilities and potential exploitation.

Economics is also interested in quantifying trust, usually in monetary terms. The level of correlation between increase in profit margin or decrease in transactional cost can be used as indicators of economic value of trust.

Economic 'trust games' are popularly used to empirically quantify trust in relationships under laboratory conditions. There are several games and game-like scenarios related to trust that have been tried, with certain preferences to those that allow to estimate confidence in monetary terms. Games of trust are designed in a way that their Nash equilibrium differ from Pareto optimum so that no player alone can maximise his own utility by altering his selfish strategy without cooperation while cooperating partners can benefit.

The classical version of the game of trust has been described in as an abstracted investment game, using the scenario of an investor and a broker. Investor can invest a fraction of his money, and broker can return only part of his gains. If both players follow their economical best interest, the investor should never invest and the broker will never be able to re-pay anything. Thus the flow of money flow, its volume and character is attributable entirely to the existence of trust.

The game can be played as one-off, or as a repetitive one, between the same or different sets of players, to distinguish between a general propensity to trust and trust within particular relationships. Several other variants of this game exist. Reversing rules lead to the game of distrust, pre-declarations can be used to establish intentions of players, while alterations to the distribution of gains can be used to manipulate perception of both players. The game can be also played by several players on the closed market, with or without information about reputation.

Other interesting games are e.g. binary-choice trust games, the gift-exchange game and various other forms of social games. Specifically games based on the Prisoner's Dilemma are popularly used to link trust with economic utility and demonstrate the rationality behind reciprocity.

The popularisation of e-commerce opened the discussion of trust in economy to new challenges while at the same time elevating the importance of trust, and desire to understand customer decision to trust. For example, inter-personal relationship between the buyer and the seller has been dis-intermediated by the technology, and had to be improved upon. Alternatively, web sites could be made to convince the buyer to trust the seller, regardless of seller's actual trustworthiness (e.g.) . Reputation-based systems improved on trust assessment by allowing to capture the collective perception of trustworthiness, generating significant interest in various models of reputation.