Trust and Betrayal: Evidence Across Nations Iris Bohnet, Fiona Greig, Benedikt Herrmann and Richard Zeckhauser Harvard University

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Trust and BetrayalEvidence Across NationsIris
Bohnet, Fiona Greig, Benedikt Herrmann and
Richard ZeckhauserHarvard University

• Conflict and Cooperation, 2007
• Northwestern University
• November 16, 2007

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Motivation

• Generalized trust in others associated with
  good outcomes (social capital, economic
  performance, democracy,)
• But in most countries, fewer than 50 percent of
  the respondents indicate that they generally
  trust others (WVS 2004, Inglehart 2005). E.g.,
  trust rates in English speaking countries
  38 Protestant European countries
  46 Islamic countries 28
• How can trust be fosteredin Gulf and Western
  countries?
• Internet

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MechanismChanging the expected benefits from
trusting

• Elasticity of trust
• How does the willingness to trust respond to
  changes in the likelihood of trustworthiness?
• How does the willingness to trust respond to
  changes in the material costs of betrayal?
• Aversion to the lottery of trust (TL-aversion)
• Risk aversion
• Inequality aversion (social preferences)
• Betrayal aversion

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Willingness to trust for given likelihoods of
trustworthiness (cumulative distribution) in US
and UAE
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Willingness to take risk

• Traditional decision analysis/economic
  theoryAttitudes to risk
• But what if the agent of uncertainty are people
  rather than nature?Behavioral economics on
  social versus natural risksAttitudes to
  betrayal
• Social risks include
• Speculative bubbles, HIV, terrorism
• Principal-agent relationships, asymmetric
  information, incomplete contractsTrust
  interactions

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Risks of betrayal versus natural risks

• Payoffs to other(s)Social preferences
• Agent of uncertaintyCausal attributions
  (intentions) beyond outcome-based preferences
• HypothesisHolding payoffs to others constant,
  if people have an aversion to betrayal, they will
  be less willing to take risks in a trust
  situation than in an equivalent situation where
  chance determines the outcome.

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Context

• Differences in societal, economic, political
  organization and law suggest that trust is
  produced differently in Western than in Gulf
  countries.
• Western countries Contractual arrangements.
• Gulf countries Loyalty.

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1. Contracts

• Western law Damages for betrayal part of most
  contractual arrangements. US contract law -
  efficient breach - perfect expectation
  damages victim of breach as well off
  financially whether there is performance or
  breach. ? Goal Decrease cost of betrayal.
• Islamic law Damages unheard of. Gharar Risk
  taking is prohibited under most circumstances.
  Trust is risky. Damages would encourage risk
  taking (gharar contracts). ? Goal
  Eliminate likelihood of betrayal.

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Trust Game
Principal

• Principal confronted with a sure outcome and a
  lottery, A and B.Principal does not know p, the
  probability that Agent chooses 1 if Principal
  chooses B.Probability that makes the lottery
  actuarially fairp.29

B
A
Do Not Trust
Trust
Agent
1
2
p
1-p
P10 A10
P15 A15
P8 A22
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Experimental Design

• Three treatment conditions
• Binary-choice trust game (TG) Principal chooses
  between sure thing and trusting an anonymous
  agent. Agents decides whether to reward trust.
• Binary-choice risky dictator game (RDG)
  Principal chooses between sure thing and lottery
  with identical payoffs to principal and inert
  agent (recipient).
• Binary-choice decision problem (DP) Principal
  chooses between sure thing and lottery with
  identical payoffs to principal. No second person
  is affected.

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Risky Dictator Game (RDG) and Decision Problem
(DP)
Principal

• Principal chooses between sure thing and
  lottery. The agent of risk is
  nature.Principal does not know the probability
  of getting the higher outcome in the lottery,
  p.Principals decision affects Agents payoffs
  in RDG but no second person is involved in DP.

B
A
Nature
p
1-p
P 10 A 10
P 15 A 15
P 8 A 22
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Measuring betrayal aversion

• Compare behavior in TG and RDG Attitudes to
  betrayal.
• Compare behavior in RDG and DP Social
  preferences (incl. efficiency concerns).
• Compare behavior in DP and probability that makes
  lottery actuarially fair Risk preferences.

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MAP

• Introduce new methodology to measure willingness
  to take risk under different circumstancesWith
  MAPs (minimal acceptable probabilities) we
  measure how high the likelihood of getting the
  better outcome (15,15) minimally has to be for
  the principal to choose the risky over the sure
  outcome.
• For example, in a binary-choice trust game, we
  ask principals (in neutral language) Out of
  100 people, how many would minimally have to be
  trustworthy for you to be willing to trust??
  MAP Minimal Acceptable Probability
• Compare principals MAPs to p, the fraction of
  trustworthy agentsWe simultaneously ask agents
  (in neutral language)If your principal trusted
  you, would you be trustworthy? (strategy method)

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Determination of payoffs

• If Principals MAP is higher than the actual
  probability of trustworthiness, p, (gaining the
  higher outcome in the gamble), then both players
  get the sure option.
• If Principals MAP is equal to or lower than the
  actual probability of trustworthiness, p,
  (gaining the higher outcome in the gamble), then
  the agents decision (the lottery) determines
  final payoffs.
• Agents are not informed on MAP procedure.
• Incentive compatible mechanism people should
  reveal their preferences truthfully.
• p constant across treatment conditions.
  Determined by the average p in the trust games,
  which were run first. Subjects in RDG and DP
  informed that p was determined beforehand.

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What we learn Net effects
0.29 is the MAP that makes a risk-neutral player
indifferent between the sure thing and the risky
option
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Experimental Details

• Design Between-subjects, one-shot, anonymous.
• Subjects To establish generality of betrayal
  aversion, experiments run in very different
  places. 614 students at universities in Brazil
  (Rio), Switzerland (Zürich), United Arab Emirates
  (Al-Ain), and United States (Boston).
• Incentives Preserving PPP (practically
  opportunity cost of time).
• Instructions translated (and back-translated)
  into respective languages.

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Result 1 Subjects are betrayal averse. MAPs in
TG and RDG MAPTGgtMAPRDG
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Betrayal Aversion by Country(no cross-country
differences in p0.33)

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Result 2 No sig. evidence of social
preferences.Result 3 Subjects are risk averse.
MAPDPgt0.29
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Social and risk preferences by country

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Bootstrap results for the three preference
phenomenaPercent of randomly drawn sub-samples
smaller than the experimentally observed country
sample
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Determinants of MAPs (OLS)
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Result 1 Willingness to trust (MAPs in )no
cross-country diff. in trustworthiness approx.
37
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Result 1 TGgenderMen MAPGulfgtMAPWest,
plt0.05, MW-test Women MAPUAE, OmangtMAPSWI, US,
Kuwait
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Result 2 Elasticity of trust (1)(dt/(1-t)/dw/
(1-w) -- percent reduction in those not trusting
over the percent reduction in those not being
trustworthy)
 
 
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Result 3 Responsiveness to Costs of Betrayal
MAPTGhigh gt MAPTGlow in USn.s. in Oman
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Table 3 Significance of betrayal aversion,
social preferences and risk aversion, by gender
and country, based on rank order tests.
significant at 5 significant at 1.
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2. Loyalty(Arab Human Development Report 2004)

• 2. Societal organization Clannism/tribalism
  obedience and loyalty are offered in return
  for protection, sponsorship, and a share of the
  spoils. (p. 145)
• 3. Political system Authoritarian
• Clannism flourishes wherever civil or
  political institutions that protect rights and
  freedoms are weak or absent. Without
  institutional supports, individuals are driven to
  seek refuge in narrowly based loyalties that
  provide security and protection (AHDR 2004
  146).
• 4. Economic structure (Oil) Rent-based
  economygovernment as a generous provider that
  demands no taxes or duties in return but is
  entitled to require loyalty from its citizens
  invoking the mentality of the clan. (p. 152)
  Taxes account for approx. 5 of GDP in three
  Gulf countries.

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Question

• Do these differences affect subjects
  TL-aversion and the elasticity of trust?
• ? Contract law (damages) increases trust by
  decreasing the material costs of betrayal
• ? Loyalty increases trust by decreasing/eliminat
  ing the likelihood of betrayal

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Explanations for Betrayal Aversion

• Betrayal Costs
• Losses When p is Less than Reference Probability

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Betrayal Costs
Solving for MAP, we have
When a Decision Maker gets the bad outcome in the
Trust game (when his trust is betrayed), he
incurs an additional negative element. We call
this a betrayal cost. This implies that,
even when the monetary payoffs are the same in
the two games. A lower UB implies that MAP in
trust game is higher.
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Conclusions

• People are less willing to take risk when the
  agent of uncertainty is another person rather
  than nature betrayal aversion. ? Behavioral
  economics People do not only care about
  outcomes but also about how outcomes come to be
  (e.g., Rabin 1993).
• People are slightly more willing to take risk
  when another person benefits from risk taking
  positive social preferences and generally are
  risk averse.
• ? Behavioral economics People care about
  payoffs to others and/or about efficiency
  (e.g., Fehr and Schmidt 2002 for a survey).
• The RDG and the MAP elicitation procedure may
  prove to be useful innovations to examine
  willingness to take risk under different
  conditions.

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Conclusions, continued

• Cross-regional differences in TL-aversion and
  elasticity of trust. ? Changes in the
  likelihood or the material cost of trust
  strongly affect behavior in the Western but
  hardly in the Gulf countries.
• There are plausible methodological explanations
  for betrayal aversion.