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When placing trust in someone, defaults matter — Pop Economics

When placing trust in someone, defaults matter

by Pop on December 14, 2010

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Is your default “trust” or “no trust”?

After the accounting scandals earlier this decade (think Enron and WorldCom) many economists were puzzled as to why investors didn’t pick up on problems sooner. Why weren’t the accounting firms that supposedly checked up on these guys under more scrutiny? Why were they still not under more scrutiny after Enron blew up and accounting firm after accounting firm was revealed to be pandering to company executives?

Some economists decided that we were just naturally trusting of certain kinds of relationships. That might sound ridiculous until you start to think about it.

When I choose a contractor to renovate my kitchen, my default is “no trust”. I’ve heard enough contractor horror stories that I’m going to want references and a contract that spells out what happens if he misses deadlines.

Do I show the same distrust with my doctor, lawyer, or hypothetical kid’s teacher? For whatever reason—government regulation, certification boards, or whatever—I’m just more naturally inclined to believe the opinions that those types of people give me.

Some of this is changing of course. The performance of doctors and teachers in particular have been under intense scrutiny. But they’re still professions that I just kind of assume are doing their jobs in the right way, in the same way that investors might have been assuming that Enron’s accountants were doing their jobs.

Even though more kitchen contractors might be skeezballs than doctors (no offense, contractors!), when that doctor, lawyer or accountant does abuse that default of trust, the potential consequences are much more dire. You expect that contractor to have surprise expenses and delays. If the other guys rip you off, you might be blindsided.

Now, you just know that some economist, somewhere, had to go out and devise a diabolical “distrust game” to see the impact of trust or distrust in action, right?

The distrust game

In case you’re not familiar with our new game’s predecessor, lets do a quick review of the “trust game”. In a typical version of the trust game, two players, Joe and Brian, get $10. First, Joe decides whether or not to send some or all of their money to Brian, and the money he sends triples. Then, Brian decides whether or not to send some of the money back.

So…say Joe trusts Brian completely and sends $10 over, which turns into $30. Now Brian, who has $40, can reward his trust by sending $20 back and splitting the take, can keep everything for himself, or do something in between.

Anyway, economists at Harvard decided to devise a new experiment where players take money from each other instead of giving it.

Eric starts with $0, and James starts with $40. In stage one, Eric can take up to $30 from James, but his take would actually be what he steals divided by three. So for example, Eric can take $30, leaving James with $10 and himself with $10.

Similar to the regular trust game, in stage two, James decides how much of the remainder to send to Eric. If Eric left him all $40, he could just keep all $40 for himself or reward the trust by splitting the pot.

Get it? Kind of like the trust game in reverse.

The Harvard professors tried out both the trust and distrust games on 134 college students to see if their behavior differed.

Uh, can you please make that understandable?

Sorry the games are hard to follow. I wish I conjure up a little widget so you could play the games yourselves, but the bottom line is this. In the trust game, the default is to not trust someone. You have to choose to give over part of your cash in order to have the possibility of the second player rewarding that trust or screwing you over.

In the distrust game, the default is to trust. You have to consciously decide how much you don’t trust the guy and take money from him before the second stage.

As the experimenters predicted, with the new game, students were more prone to leave money in the hands of the second player. And in return, they actually got screwed over more often. Nice.

People don’t distrust enough.

At least, that’s the conclusion of the Harvard researchers. But more than that, the researcher plays into the ongoing collection of research that shows we’re lazy bums. We’re creatures of inaction and defaults.

Fixing defaults in other areas of our lives is pretty straightforward. You set up automatic deposit on your IRA to take money from your bank each month and don’t have to worry about taking the action to invest 12 times a year.

But how do you fix a problem that involves a default feeling and one that you might not even know is bad? A couple decades ago, doctors were gods. Even now that we have more accurate performance measures and know about countless times doctors have screwed up, it’s never crossed my mind to get a second opinion. In the same way, I’ve just kind of assumed my lawyers had my interests at heart and teachers were telling the truth.

Is that even something we should fix? I’m at a loss. It would be exhausting to have to second-guess everyone who provides a service.

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{ 5 comments… read them below or add one }

Rob Bennett December 15, 2010 at 2:42 pm

It would be exhausting to have to second-guess everyone who provides a service.

We need shortcuts, Pop. One shortcut is to count on others to perform the necessary vetting. For example, most of us turn to our favorite political figures to signal to us how we should feel about a particular issue. We don’t have time to research each issue for ourselves.

The benefit is that the shortcut makes it possible to live life and still have reasonably informed political views. The downside is that, if you make a mistake on the figure you choose to listen to as your shortcut figure, you are really making a mistake on dozens of issues all at one time. Yikes!

I don’t think we can get away from using shortcuts. But we need to try to keep in mind the limitations of doing so. We need to remind ourselves from time to time that our views on the other issues were not the product of independent thought.

Rob

jim December 15, 2010 at 4:18 pm

Reputation and perceived expertise are what we usually base our trust on.

You don’t trust contractors due to bad reputation but you do trust doctors due to good general reputation and high expertise. We trust accountants due to high expertise and good reputation.

Reputation and expertise may be biased and skewed. People distrust landlords way too much in my opinion but then I’m a landlord.

Part of it is based on how complex the system is and how easy we can realize that the expert is or isn’t giving us good information or good service. We all understand a new kitchen sink and granit counters ( or at least we think we do) but most of us don’t understand the revenue on an Enron balance sheet. If you understand it easily you may be a lot more likely to question the expert if what they tell you doesn’t match what you expect. But if you don’t understand the system then you have little basis to question the opinion of the expert.

Anonymous December 15, 2010 at 5:54 pm

Sorry for a slightly tangential comment, but your opinion of doctors surprises me. I’ve never understood why people trust MDs so much. I count three among my closest friends, and they went to excellent medical schools. That said, it’s ridiculous to think that studying Powerpoint presentations for two years and copious clinical experience could endow anyone with more than some strongly entrenched heuristics. There’s no hypothesis testing, no rigor, no analysis, and minimal feedback: the sample size is almost always one, and there’s no control. Recertification requirements are modest, so there’s no real drive to stay on top of the literature. Doctors are, of course, finite, and there are lots of reasons why things are the way they are–but I’ve been deeply confused why anyone wouldn’t think to get at least a second opinion.

Anonymous December 15, 2010 at 6:05 pm

A quick follow up: I think a lot of the differences in the affects of doctors and scientists come from scientists’ having to tell one another on a nearly daily basis that they don’t understand something or don’t have the answer. As a consequence, they can sound hopelessly equivocating, esoteric, and vague in answering questions. Doctors more or less have to conceal gaps in their knowledge all the time, and they’re used to boiling complex ideas to simple (and often inaccurate or speculative) models for patients–or obscuring their uncertainty in diagnoses involving the word “idiopathic.” To outsiders, doctors sound more impressive; there are also obvious reasons why we might be emotionally invested in trusting them, too.

I try to trust methods, not people. For medical advice, I value MDs with PhDs in the field and check peer-reviewed literature. For legal advice, I’d try to do my homework and talk to as many lawyers as I can. For many other things, there’s Consumer Reports, Amazon reviews,… and then not caring. It can indeed become exhausting.

jim December 16, 2010 at 8:05 pm

I found an article on WebMD that cited a gallup poll this month that said that “The new Gallup Health and Healthcare Survey shows that 70% of Americans are confident in their doctor’s advice and don’t feel a need to seek out a second opinion or do additional research on their own.”
Education level didn’t impact the results. But 85% of people over 65 years old trust their doctors vs 65% for people under 50 years old.

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