Saturday Apr 07, 2007

More on Trust

[Earlier, I have written about the concept of "trust," including trust in the cyberspace. I have also shared a paper and pointed to Oliver Williamson's analysis of the concept of trust and to his papers on credible commitments, comparing it to the analysis Thomas Schelling offers in his work on conflict and strategy.]

Michelle Dennedy, Sun Microsystems' Chief Privacy Officer, has written a note about "trust" in which she gives the formula: "GOOD MANNERS x STANDARDS x TRANSPARENCY x TIME = T R U S T...maybe."

Here is my analysis of this formula which I think is a bit different from Dennedy's. 

The time element has to do with repeated transactions and/or long-term relationships.  Through repeated transactions with a particular party we gradually become familiar. An element of "reputation" is introduced. In long-term relationships (of business or other kind), parties to the transaction often make relationship-specific investment, through which they come to "trust" each other more because they have mutual stakes that will be lost if the relationship is broken.

The transparency element has to do with an openness which again produces mutual stakes. Each party knows valuable information about the other party to the transaction. This alleviates some of the information asymmetries which often lead to a lack of "trust."

With standards, we can define or at least bound the rules of the game. Laws contain standards and permitted mechanisms for their application. Knowing the rules of the game to be the same for both parties leads the transacting parties to understand how the other party will react under certain circumstances. Standards, like transparency, also help with reducing information asymmetries.

We can think of good manners as an adequate implementation of standards. If one does not exercise good manners, one will most probably have broken the standards, one may then find no choice out the quagmire but to become less transparent, which often will lead one to be less worthy of long-term relationships through time. Thus, one becomes less trust-worthy.

Addendum

By way of extracting a few paragraphs from one of my comments on this entry, I'd like to share another formula.

First, note that good manners, consistency of behavior and standards all can be categorized under the same element, perhaps "consistency" ...

On the other hand, transparency has a lot to do with information exchange and asymmetries. Such mutual "hostages" (a la Thomas Schelling and Oliver Williamson) in the form of valuable information on one's transacting partner can actually cement "trust" by creating mutuality of vulnerabilities.

Transparency and information sharing is only one way to cement "trust" relationships through mutual vulnerabilities. Here are some other examples: Employees working for a firm often learn firm-specific skills. They are also often protected by the firm against market ups and downs and receive special benefits for remaining with the firm. Many other examples have to do with mutual investments that could lost in case a "trust" relationship is broken. (Relationships are broken when "trust" is lost.) The "trust" relationships between the U.S. and Europe and between the U.S. and Japan are as much based on tremendous and large mutual investments as on anything else. (See also Hubert Dreyfus' discussion of "trust" in his On the Internet. He describes and gives some real-life examples of how mutual vulnerabilities lead to trust.)

Finally "time" has often more to do with reputation than with "trust." In fact, one may argue that "time" only plays into trust when it leads to greater mutual vulnerabilities in the relationships because of some relationships-specific investment by both parties.

So, an alternate, simpler formula could then be

CONSISTENCY x MUTUAL VULNERABILITIES = TRUST

Some have also argued "consistency" out of the formula because they believe that consistency in relationships grow out of "mutual vulnerabilities" that demand consistent behavior. In this sense, "consistency" multiplier applies to both sides of the equation and can be eliminated from both sides.

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