Can trust affect the outcome of political events (war), business transactions (pricing) and economic affairs (poverty)?
This is a problem that I’ve been very interested in for many years.
A few years ago I came across papers in economics and game theory that supplied the mathematical tools that we need to analyse such problems.
So, I’ll take each area of interest 1) politics 2) business and 3) economics and explain how trust matters in each case.
Can the outcome of something like war be determined by trust?
Let’s assume an army of 2 soldiers.
In a war, the benefits to each soldier can be modeled as a bi-matrix (normal-form game) as follows:
|soldier 2 fights||soldier 2 flees|
|soldier 1 fights||5, 5
|soldier 1 flees||0, -5
|Normal form or payoff matrix of a 2-player, 2-strategy game|
The first of the two numbers in the matrix represents the payoff to soldier 1.
The second of the two numbers in the matrix represents the payoff to soldier 2.
(The soldiers win something (represented by 5 points) if their army wins; they win nothing if their army loses; and they lose their life (represented by -5 points) if they do not flee and their army loses; we assume the army wins if both soldiers do not flee and loses if one or both flee).
If soldier 1 trusts soldier 2 not to flee the battlefield, the best strategy for soldier 1 is to stay and fight as well (since he will then get more benefits than if he flees).
If soldier 1 does not trust soldier 2 to stay on the battlefield (if he suspects that soldier 2 will run away), then the best strategy for soldier 1 is to run away himself (so that he does not remain on the battlefield and get killed).
So, this model shows that if two equal 2 man armies meet on a battlefield, the one whose soldiers trust each other more will win.
2. Business (Pricing)
There is a very interesting paper by George A. Akerlof (‘The Market for “Lemons”: Quality Uncertainty and the Market Mechanism’).
It tries to explain why the price of a new car in a show room is so much higher than the price of a new car in the second-hand car market.
For example, a car costing $25,000 fresh out of the showroom, might fetch $18,000 if sold as a used car in the used car market.
Akerlof’s paper tries to explain why the price dropped so sharply.
Akerlof suggests that the price drop is a result of the uncertainty surrounding the quality of the car in the used-car market.
A certain percentage of cars in a used-car market will be defective (since anyone can sell a car in an unregulated market, and unscrupulous people would have put defective cars up for sale).
Let’s say 50% of the cars in the used car market are defective.
Now, a person buying a used car a day old will only be prepared to risk paying 50% of the showroom price for the car (because of the 50% chance that the car is worth nothing).
The Price of Trust
This result has the following unintended consequence:
The more a person trusts a seller, the higher the price he will be willing to offer for a car.
I’ll give you an example of that. (I’m sorry, but this is a bit racist).
When I was a student in North Carolina, and I was looking to buy a used car, I was given the following piece of advice by my fellow students.
They said, “Go for a car that an American is selling because they will tell you about any problems that it has. Don’t buy a car from an Asian or an Indian unless you know them well. They won’t tell you if there are any problems.”
I see the same effect even when doing business in India today – a lot of business happens through connections.
It might also explain why Indians are so price sensitive.
Indians are said to be very price-sensitive, preferring the less expensive offerings over more expensive ones that promise better quality (I recall Richard Branson said that at one point while explaining why he didn’t want to enter India).
I think the price sensitivity is a result of Indians not being able to trust promises of higher quality from their countrymen.
Price becomes the only measure that Indian buyers are able to trust to when making a purchasing decision, leading to extreme price-sensitivity in the Indian market.
Hiring and ‘Brain Drain’
Even in hiring, this can have the effect of driving down salaries.
When hiring someone, an Indian firm is likely to offer a lower salary than the market, because they don’t trust in the abilities of the person being hired.
In Akerlof’s paper, he talks about a side-effect of a lack of trust. He says that good quality cars will just stop being sold on the low-trust markets.
The applies to the job market in India as well: Indian firms tend to offer lower salaries, which might lead to the best engineers choosing MNCs over Indian firms or leaving Indian shores altogether.
I’ve described in an earlier blog how man-in-the-middle systems of government can fail to work efficiently if the man-in-the-middle is corrupt.
I’ve described in that post how resources can be wrongly allocated in the presence of corruption.
The result of an inefficient allocation of our resources is poverty.
For example, the Indian government has tripled defence spending in the last 10 years – through heavy borrowing – when it is possible to show that we need to allocate whatever money we have to education (see our arguments for that https://aiaioo.wordpress.com/2012/06/04/algorithms-to-combat-poverty/).
World Bank studies (that you can get off an Indian Reserve Bank website) show that corrupt governments spend more on arms (because of how easy it is to hide kickbacks from arms deals) than honest governments.
So, the economic prosperity of a country can be impacted by corruption.
Causes of Corruption
But we can ask a deeper question: “What causes corruption?”
I’ll try to show right here that it is a lack of trust.
Take for example two players in a bidding war (let’s say that they are bidding for a government contract).
Each has the choice to give a bribe or not to give a bribe.
Player 1 is more likely to give a bribe if player 1 does not trust player 2 to not offer a bribe to the government official.
It’s the same decision matrix that I have used for the case of the 2 soldier army.
So you get it?
Everything depends on trust.
I am probably way out of my depth on this, but the ancient Greeks seem to have had two views on the supreme ideal that man should strive for.
According to the Wikipedia article on Dialectics:
But there lived in Greece a man who disagreed with that notion: ”Socrates favoured truth as the highest value, proposing that it could be discovered through reason and logic in discussion: ergo, dialectic.”
But the above models seem to suggest that truth (honesty) results in trust (you know that the guy next to you is honest and won’t lie about the quality of a car or bribe a government official to get ahead of you).
And what the Akerlof paper shows is that trust rewards and promotes quality.
In other words, the two Greek concepts of quality (of the values mankind must uphold for its own good) are probably one and the same.
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[The image in this picture was taken from a circulated Facebook post. The copyright owner of the image is unknown at this time and if anyone knows him/her I’d like to make sure they’re ok with my using the image and acknowledge them].