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The Economics of Trust

 

Explanations > Trust > The Economics of Trust

Cost of developing trust | Cost of maintaining trust | Cost of trust failure | Trust capital

 

Like quality, trust costs. I can either pay up-front to assure it, or I can cross my fingers and end up paying a potentially much higher price down the line. The greater the distrust, the higher the price in terms of building and assurance, let alone any failure costs.

Cost of developing trust

It takes time to build trust. We may start by researching the other person’s background, perhaps by asking other people or scanning their resumé. We can always watch them at work, interacting with other people as well as ourselves. And we can check their actions over time.

Cost of maintaining trust

On an ongoing basis, how do you stay confident that you can trust what they are doing? This often takes the form of formal measurement, reviews, approvals and so on, effectively looking over their shoulder to double-check that they are doing what you want them to do. When they offer advice or make recommendations, trust assurance may include getting a second opinion or utilizing further evaluation methods.

Each interaction thus has a transaction cost, which includes the cost of getting to the person with whom you will interact, along with the cost of assuring trust. A significant reason why companies exist is to reduce that transaction cost. If I am a sole trader, I need to first find customers and suppliers and then decide whether I can trust them. It’s a better economic proposition to form a working group where access is faster and trust levels can be build up beforehand, such that in each transaction we can both quickly get down to business.

Cost of trust failure

When trust is broken, work not only may need to be redone but there may be other, far more serious knock-on effects. A single trust failure can have a knock-on impact other trust relationships, such as when a person you have trusted to do some work for a customer has failed in some way, resulting in the customer’s trust in the whole company and brand being affected.

Trust failure can also lead to retribution and revenge, where the betrayed person seeks compensation beyond that which may be considered as fair. They have been emotionally hurt and want to exact a penalty that emotionally hurts you in return. If they had given you a high level of trust and feel very strongly about the betrayal, then their actions may be very damaging.

Revenge actions can also cause counter-reactions, where the avenged-upon also feels emotionally wronged and seeks revenge for the revenge. In this way, simmering feuds and outright battles can erupt, with the accompanying fall-out that can suck many others into the fray.

 

 

Trust capital

Trust is like a pot of money. When we do something for other people, we put money in the pot. When they do things for us, they take money out of the pot. The problem is that when we act in an untrustworthy manner, we are fined a huge amount and we can even become bankrupt. And when trust is lost, it requires an even larger investment over a period of time to restore.

Individually, we have trust capital with the people around us, which determines how much they trust us and how quickly they will act to help us when we ask things of them. Companies and groups also have trust capital within them, which is the aggregate trust levels of the people within the company.

There is also an external trust capital, which approximates to the internal levels. This is the brand value of the company, which is the aggregate of the trust placed in the company by all of its external stakeholders, including customers, shareholders and suppliers. When I buy a Volvo, I am trusting the Volvo brand that it will be safe. When I shop at Safeway, I am trusting that their prices will be uniformly low.

 

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