How Does Wealth Inequality Affect Trust?

An old Frank Zappa lyric went, “What’s the ugliest part of your body? I think it’s your mind.”

Similarly, we might ask, “What’s the lowest-trust place in (corporate) America? I think it’s Wall Street.”

Which brings us to the latest issue of Harvard Business School Working Knowledge.

I find HBSWK a pleasure to read—they identify the coolest topics for study. The treatment of those topics—well, that can be quirky.

One fascinating current item is “The Dynamic Interplay of Inequality and Trust: An Experimental Study,” by Ben Greiner, Axel Ockenfels, and Peter Werner.

Here’s the (partial) synopsis:

We study the interplay of inequality and trust in a dynamic game, where trust increases efficiency and thus allows higher growth of the experimental economy in the future. We find that trust is initially high in a treatment starting with equal endowments, but decreases over time. In a treatment with unequal endowments, trust is initially lower yet remains relatively stable.

Cool! An egalitarian society shows a greater decay of trust than one with initially disparate endowments? The implications for political theory, economic policy and social dynamics are juicy, to say the least.

The “dynamic game” the authors use to add some empirical juice to theoretical discussions involves a trustor and a trustee. In a series of interactions, the trustor offers a sum of money to the trustee, which sum is then multiplied by the game; the trustee then returns a certain amount to the trustor.

As the authors say, “The amount sent can be interpreted as a measure of trust, while the amount returned measures the degree of trustworthiness.”

Then ensues 20 pages of analytical bludgeoning. Did you know about the Wilcoxon Matched Pairs Signed Ranks (WMPSR) test? Me neither. Did you know the lowest Gini factor ever measured was in Bulgaria in 1968?

I am numbed and humbled; you could say I’m numbled.

And sure enough, the graphs show a decrease in trust if all players start equally, vs. a low-trust start with sustained low trust if players begin with inequality.

But wait a minute! What happened to Frank Zappa?

The appendix lists the instructions given to the players in this game. Here they are:

Welcome! You can earn money in this experiment. How much money you earn depends on your decisions and the decisions of the other participants…it is guaranteed that you do not ineract with the same participant in two subsequent rounds…The identity of the participant you are interacting with is secret, and no other participant will be informed about your identity.

OK, so I want to measure the role of trust and inequality in an economy. Where should I go?

Los Angeles? Omaha? Detroit?

Nah. Let’s go somewhere people aren’t distracted by entertainment, or meat-packing, or cars.

Let’s go where people interact solely around money. Anonymously. And never with the same person twice. (Blindfolds and knives might make it even more interesting).

And let’s call that a trust experiment.

If this game had a geographical correlate, it would have to be the Land of Gekko, where Fear and Greed are baseline hiring criteria—Wall Street.

Not exactly where I would have suggested one go searching for insights about trust.

What’s the ugliest part of that trust? I think it’s the game.

 

3 replies
  1. Lark
    Lark says:

    Maybe a better place to begin this "game" would have been to frame it with a proper discussion of the value of  money itself.

    In this scenario, trust was lost before the game even got started – in fact, every sane person I know realizes the game is already up… since the value and purchasing power of our currency is obviously manipulated… and today it is mostly counterfeit.

    The game, as you suggest, is indeed rather ugly.  Some people may not be so inclined… to be forced… into such a foolish game – and yet all of have been herded into compliance.

    As for business conducted in our capitalist society… and as it’s presently being taught in prestigious universities like Harvard and the London School of Economics, for instance… it’s not really based… on unfettered access to free markets… or even of sound money.

    So are we to willfully trust in any conclusion reached by way of such elitist groupthink – one that’s pre-determined with  a bias towards  collectivism… and involuntary coercion… expedited by mind-numbling indoctrination?

    I think not.

    Equal personal endowments are not nearly so important as the game is not deliberately rigged in advance. This, to me,  is where questions of trust and inequality… must logically begin… if such experiments are to have any useful purpose in the future.

    But given this was merely an academic exercise described in the Harvard piece… who knows, maybe the participants assumed monopoly money was actually in play from the get-go.

    And, no doubt, our good friend Mr. Gekko would’ve smilingly approved.

    Aside from this, Zappa will always be a hero of mine – since he championed the simple idea that one could think for themselves… and not be so easily brainwashed… by silly man-made authoritarian constructs… in the first place.

    You know, Charlie, I think Frank would’ve liked your word "numbled".  I was frankly numbled… that you could bother to read… such mind-bending stuff!

    So do you figure we could all be better off… by moving to Montana… like soon? Then we might rediscover our dirty love for money… perhaps is… hey, how about let’s all of us… boot-scoot it out of town… and just be dental floss tycoons?

    Sounds like a more fun experiment to me! 🙂

    Reply
  2. James Bullock
    James Bullock says:

    What’s that old saw about psychology? It’s a science of behavior based on experiments performed on sleep-deprived undergraduates and under-fed rats?

    To study "trust" in financial transactions, one might look at "hawala", a trans-national brokerage & funds transfer web based entirely on the "honor system." If you want to study something look where it is. Otherwise you are doing the drunk looking for his keys under the streetlight thing. That’s now where he lost them, but it’s where the light it.

    Via BoingBoing here: http://www.boingboing.net/2007/11/23/hawala-an-ancient-gl.html

    Wikipedia: http://en.wikipedia.org/wiki/Hawala

    Reply

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