Trust as the Foundational Economic Exchange Principle

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Trustas the Foundational Economic Exchange
Principle
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Trust and the economic exchange process

• We will argue that
• Trust does not just add to the functioning of
  economic exchange (e.g. ) but
• Builds the foundation of economic exchange
• We will provide a socio-cognitive analysis of how
  trust works in both exchange scenarios
• Barter
• Money mediated exchange

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Our questions How does Money impact on Trust
relationships? What kinds of Trust does Money
require?
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Trust a definition

• In our view (Castelfranchi, 2008 Castelfranchi
  Falcone, 2001), Trust is a mental state, a
  complex attitude on an agent X towards another
  agent Y about the behavior/action a relevant for
  the result (goal) g Trust (X Y t)?
• First, one trusts another only relative to some
  goal
• Second, trust itself consists of beliefs

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Trust
Trust Disposition (TD)?
Decision to Trust (DtT)?
TD
Act of Trusting (AoT)?
TD
DtT
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Barter, a socio-cognitive perspective (1/3)?

• Economists consider barter as the primitive
  precursor to monetary exchange. Since Javons
  (1875) famous formulation double coincidence of
  wants barter has been dismissed as an
  inefficient form of exchange.
• It is however less the double coincidence of
  wants rather than the trust-intensiveness which
  renders barter inefficient

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Barter, a socio-cognitive perspective (2/3)?

• The true difficulty in barter is not the wants
  dimension but
• when and how fast giving and taking (exchange)
  will conclude (Hobbesian Covenant dilemma)?
• both exchanging parties need to agree explicitely
  on the terms of exchange due to the improbable
  synchronizity (who gives what where and when
  first)?
• Given the contractualization of economic exchange
  processes, trust has to be considered an apriori
  condition to the factual exchange

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Barter, a socio-cognitive perspective (3/3)?

• Sussessful barter requires the same trust
  disposition beliefs of both exchanging parties
• Both, X and Y, have to trust
• 1) The other agent, in terms of his/her
  Willingness, Motivation Belief, Skills and
  Compentences
• Reliability evaluation she/he will give me what
  he/she told me
• 2) The offered Goods not only does the other
  need to be reliable, but the good has to be a
  good one (quality)?
• Thus, a fourfold trustworthyness has to mediate
  the barter exchange

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Money mediated exchange

• Money exchange requires two different trust
  disposition bliefs
• Buyer The agent which buys the good has the same
  trust reasoning as a barter agent
• Seller The agent which sells the good has a
  different trust reasoning

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Monetary Minds

• Buyers Mind (X)?
• Like in barter, in order to buy Ys good, H has
  to trust
• Ys Willingness, Motivation Belief, Skills and
  Competence
• Ys goods not only is Y reliable but the quality
  of the good has to be good
• (caveat emptor)?

• Sellers Mind (Y)?
• To sell his/her good,
• Y does not need to trust Xs Willingness,
  Motivation Belief, Skills and Competence
• Because it is sufficient to trust that Xs money
  is real money, useful for any future exchange

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Trusting the Money Token (1/2)?

• The Trust, which was before focused on the
  exchanging partner has changed into trust in the
  money token
• and implicitly, trust in the institution which
  issues the money, since it is the institution
  which creates money and not the exchanging
  partner.
• gt a strange kind of three party trust emerges

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Trusting the Money Token (2/2)?

• Three party trust
• Y trusts X as for giving him/her what X promised
  (being reliable, willing and honest)?
• Then y is trusting the money issuing authority, a
  trust which is not very explicit and conscious
  because
• Y trusts the money token per se as being good
  (money).

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The Implicit Money Complicity (1/2)?

• However for money to function as money the act of
  giving money has to count as buying or paying
  (not allways giving money is buying)?
• The count as notion refers to the fact that
  both agents have to recognize the act of
  giving/taking money as buying/selling.
• The count-as function apears to be automatic
  implicit and mechanic, however

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The Implicit Money Complicity (2/2)?

• The Count-as money function presupposes the
  complicity that the involved agents share the
  view, that is, share the belief in the same
  cognitive action frame so that the other will
  behave accordingly
• Only the complicity of the interacting other
  establishes the functioning of money as a medium
  of exchange
• Thus the buyer has to trust that money counts as
  money for the seller

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The Reification of Trust in Money

• Money canceles almost one half of the trust
  required for direct exchange.
• The trustworthyness of the payer is reduced to
  the sole reliability of paying
• The eliminated trust is transfered to a third
  party, which promisses that this money is good
  for future exchanges with all sellers
• The promiss of the institution is however based
  on pure trust that all sellers trust the
  institutions promise
• The trust loop from market agents to the
  institution back to the market agents leads to
  the reification of the complex tust scheme into
  an implicit operational trust in the money token
  per se.

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Consequences

• The inherent unilateral information asymmetry in
  money mediated exchange
• The buyer pays for a "supposed" value of V! (in
  terms of SEU, the supposed value the
  probability of its expected quality gt This
  necessary is less than the proclaimed value by
  the seller)
• Further, the buyer also pays with anxiety, trust
  effort, etc. (costs)
• gt thus, a rational for the endowment effect
  rather than the asymmetric loss/gains reasoning
  of the Prospect Theory framework. Empirical data
  (e.g. Dupont Le, 2002)?

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Stop?
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References

• Castelfranchi, C. (2008). Trust and reciprocity
  misundertandings. International Review of
  Economics, 55, 45-63.
• Castelfranchi, C. and Falcone, R. (2001). Social
  Trust a cognitive approach. In Kluwer Academic
  Publishers, Trust and deception in virtual
  societies.
• Castelfranchi, C. and Falcone, R. (in press).
  Trust
• Dupont, D. Y. and Lee, G. S. (2002). The
  Endowment Effect, Status Quo Bias and Loss
  Aversion Rational Alternative Explanations. The
  Journal of Risk and Uncertainty, 25, 87-101.
• Javons, W. S. (1875). Money and the Mechanism of
  Exchange. London Appleton, 1875.

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