Conflict and Cooperation, 2007 Northwestern University November 16, 2007

1. Trust and Betrayal:Evidence Across NationsIris Bohnet, Fiona Greig, Benedikt Herrmann and Richard ZeckhauserHarvard University Conflict and Cooperation, 2007 Northwestern University November 16, 2007

2. Motivation • Generalized trust in others associated with “good” outcomes (social capital, economic performance, democracy,…) • But in most countries, fewer than 50 percent of the respondents indicate that they generally trust others (WVS 2004, Inglehart 2005). E.g., trust rates inEnglish speaking countries: 38% Protestant European countries: 46% Islamic countries: 28% • How can trust be fostered—in Gulf and Western countries? • Internet

3. Mechanism:Changing the expected benefits from trusting • Elasticity of trust • How does the willingness to trust respond to changes in the likelihood of trustworthiness? • How does the willingness to trust respond to changes in the material costs of betrayal? • Aversion to the lottery of trust (TL-aversion) • Risk aversion • Inequality aversion (social preferences) • Betrayal aversion

4. Willingness to trust for given likelihoods of trustworthiness (cumulative distribution) inUSandUAE

5. Willingness to take risk • Traditional decision analysis/economic theory:Attitudes to risk • But what if the agent of uncertainty are people rather than nature?Behavioral economics on social versus natural risks:Attitudes to betrayal • Social risks include: • Speculative bubbles, HIV, terrorism… • Principal-agent relationships, asymmetric information, incomplete contracts:Trust interactions

6. Risks of betrayal versus natural risks • Payoffs to other(s):Social preferences • Agent of uncertainty:Causal attributions (intentions) beyond outcome-based preferences • HypothesisHolding payoffs to others constant, if people have an aversion to betrayal, they will be less willing to take risks in a trust situation than in an equivalent situation where chance determines the outcome.

7. Context • Differences in societal, economic, political organization and law suggest that trust is produced differently in Western than in Gulf countries. • Western countries: Contractual arrangements. • Gulf countries: Loyalty.

8. 1. Contracts • Western law:Damages for betrayal part of most contractual arrangements.US contract law: - “efficient breach” - perfect expectation damages: victim of breach as well off financially whether there is performance or breach. Goal: Decrease cost of betrayal. • Islamic law: Damages unheard of. “Gharar:” Risk taking is prohibited under most circumstances. Trust is risky. Damages would encourage risk taking (“gharar contracts”).  Goal: Eliminate likelihood of betrayal.

9. Trust Game Principal confronted with a sure outcome and a lottery, A and B.Principal does not know p, the probability that Agent chooses 1 if Principal chooses B.Probability that makes the lottery actuarially fair:p’=.29 Principal A B Do Not Trust Trust Agent 1 2 p 1-p P:$10 A:$10 P:$15 A:$15 P:$8 A:$22

10. Experimental Design • Three treatment conditions: • Binary-choice trust game (TG): Principal chooses between sure thing and trusting an anonymous agent. Agents decides whether to reward trust. • Binary-choice “risky dictator game” (RDG): Principal chooses between sure thing and lottery with identical payoffs to principal and inert agent (recipient). • Binary-choice decision problem (DP): Principal chooses between sure thing and lottery with identical payoffs to principal. No second person is affected.

11. Risky Dictator Game (RDG) and Decision Problem (DP) Principal chooses between sure thing and lottery. The agent of risk is nature.Principal does not know the probability of getting the higher outcome in the lottery, p.Principal’s decision affects Agent’s payoffs in RDG but no second person is involved in DP. Principal B A Nature p 1-p P: $10 [A: $10] P: $15 [A: $15] P: $8 [A: $22]

12. Measuring betrayal aversion • Compare behavior in TG and RDG: Attitudes to betrayal. • Compare behavior in RDG and DP: Social preferences (incl. efficiency concerns). • Compare behavior in DP and probability that makes lottery actuarially fair: Risk preferences.

13. MAP • Introduce new methodology to measure willingness to take risk under different circumstances:With MAPs (minimal acceptable probabilities) we measure how high the likelihood of getting the better outcome (15,15) minimally has to be for the principal to choose the risky over the sure outcome. • For example, in a binary-choice trust game, we ask principals (in neutral language): “Out of 100 people, how many would minimally have to be trustworthy for you to be willing to trust?” MAP: Minimal Acceptable Probability • Compare principals’ MAPs to p*, the fraction of trustworthy agents:We simultaneously ask agents (in neutral language):“If your principal trusted you, would you be trustworthy?” (strategy method)

14. Determination of payoffs • If Principal’s MAP is higherthan theactual probability of trustworthiness, p*, (gaining the higher outcome in the gamble), then both players get the sure option. • If Principal’s MAP is equal to or lower thanthe actual probability of trustworthiness, p*, (gaining the higher outcome in the gamble), then the agent’s decision (the lottery) determines final payoffs. • Agents are not informed on MAP procedure. • Incentive compatible mechanism: people should reveal their preferences truthfully. • p* constant across treatment conditions. Determined by the average p* in the trust games, which were run first. Subjects in RDG and DP informed that p* was determined beforehand.

15. What we learn: Net effects *0.29 is the MAP that makes a risk-neutral player indifferent between the sure thing and the risky option

16. Experimental Details • Design: Between-subjects, one-shot, anonymous. • Subjects: To establish generality of betrayal aversion, experiments run in very different places. 614 students at universities in Brazil (Rio), Switzerland (Zürich), United Arab Emirates (Al-Ain), and United States (Boston). • Incentives: Preserving PPP (practically: opportunity cost of time). • Instructions translated (and back-translated) into respective languages.

17. Result 1: Subjects are betrayal averse. MAPs in TG and RDG: MAPTG>MAPRDG

18. Betrayal Aversion by Country(no cross-country differences in p*~0.33)

19. Result 2: No sig. evidence of social preferences.Result 3: Subjects are risk averse.MAPDP>0.29

20. Social and risk preferences by country

21. Bootstrap results for the three preference phenomenaPercent of randomly drawn sub-samples smaller than the experimentally observed country sample

22. Determinants of MAPs (OLS)

23. Result 1: Willingness to trust (MAPs in %)[no cross-country diff. in trustworthiness: approx. 37%]

24. Result 1: TG—genderMen: MAPGulf>MAPWest, p<0.05, MW-testWomen: MAPUAE, Oman>MAPSWI, US, Kuwait

25. Nation Trust elasticity Kuwait 0.81 Oman 0.57 UAE 0.21 SWI 1.17 USA 1.03 Result 2: Elasticity of trust (1)([dt/(1-t)]/[dw/(1-w)] -- percent reduction in those not trusting over the percent reduction in those not being trustworthy)

26. Result 3: Responsiveness to Costs of BetrayalMAPTGhigh > MAPTGlow in USn.s. in Oman

27. Table 3: Significance of betrayal aversion, social preferences and risk aversion, by gender and country, based on rank order tests. * significant at 5%; ** significant at 1%.

28. 2. Loyalty(Arab Human Development Report 2004) 2. Societal organization: Clannism/tribalism “…obedience and loyalty are offered in return for protection, sponsorship, and a share of the spoils.” (p. 145) 3. Political system: Authoritarian “Clannism flourishes … wherever civil or political institutions that protect rights and freedoms are weak or absent. Without institutional supports, individuals are driven to seek refuge in narrowly based loyalties that provide security and protection…” (AHDR 2004: 146). 4. Economic structure: (Oil) Rent-based economy“…government as a generous provider that demands no taxes or duties in return… but is entitled to require loyalty from its citizens invoking the mentality of the clan.” (p. 152) [Taxes account for approx. 5% of GDP in three Gulf countries.]

29. Question Do these differences affect subjects’ TL-aversion and the elasticity of trust?  Contract law (damages) increases trust by decreasing the material costs of betrayal  Loyalty increases trust by decreasing/eliminating the likelihood of betrayal

30. Explanations for Betrayal Aversion • Betrayal Costs • Losses When p is Less than Reference Probability

31. Betrayal Costs Solving for MAP, we have When a Decision Maker gets the bad outcome in the Trust game (when his trust is betrayed), he incurs an additional negative element. We call this a betrayal cost. This implies that, even when the monetary payoffs are the same in the two games. A lower UBimplies that MAP in trust game is higher.

33. Conclusions • People are less willing to take risk when the agent of uncertainty is another person rather than nature: betrayal aversion.  Behavioral economics: People do not only care about outcomes but also about how outcomes come to be (e.g., Rabin 1993). • People are slightly more willing to take risk when another person benefits from risk taking: positive social preferences; and generally are risk averse.  Behavioral economics: People care about payoffs to others and/or about efficiency (e.g., Fehr and Schmidt 2002 for a survey). • The RDG and the MAP elicitation procedure may prove to be useful innovations to examine willingness to take risk under different conditions.

34. Conclusions, continued • Cross-regional differences in TL-aversion and elasticity of trust. Changes in the likelihood or the material cost of trust strongly affect behavior in the Western but hardly in the Gulf countries. • There are plausible methodological explanations for betrayal aversion.