Trust Trust and Social Capital and Social Capital in the Information Agein the Information Age

Balázs Hámori Balázs Hámori bhamori@uni-corvinus.hu

CONFERENCEonSOCIAL CAPITAL WITHIN THE VISEGRAD CONTEXT: COOPERATION AND COMPETITION SEEN BY THE FUTURE GENERATION OF BUSINESS PEOPLE

Socio-economic function of Socio-economic function of trusttrust

““Trust is crucial wherever risk, Trust is crucial wherever risk, uncertainty, or interdependence uncertainty, or interdependence exist.exist.”” [McKnight & Chervany]

What is trust?What is trust?Trust is a Trust is a socialsocial expectation which expectation which

means that trust always refers to means that trust always refers to another another person or person or a corporative actor. a corporative actor.

I can trust my friends, my businessI can trust my friends, my business partners, my bank, but not my bike.partners, my bank, but not my bike.

Trust and uncertaintyTrust and uncertaintyThe The „„trust-takertrust-taker”” is free in his is free in his

response to the one-sided advance response to the one-sided advance concession of the concession of the „„trust-givertrust-giver””..The trust placed in the trust-taker can be The trust placed in the trust-taker can be

either fulfilled or violated by him. either fulfilled or violated by him. This implies uncertainty for the trust-This implies uncertainty for the trust-

giver with regard to the action of the giver with regard to the action of the trust-taker which cannot be eliminated. trust-taker which cannot be eliminated.

On the other hand, this means that On the other hand, this means that compulsory relations contain no trust.compulsory relations contain no trust.

The Nature of TrustThe Nature of Trust Trust can be spoken of only in situations in Trust can be spoken of only in situations in

which the which the „„trust-takertrust-taker”” has an advantage has an advantage from non-cooperative action that violates the from non-cooperative action that violates the expectation of expectation of „„trust-givertrust-giver””. . Thus, as a buyer of a sports shoe, I trust that the Thus, as a buyer of a sports shoe, I trust that the

shoe recommended to me is indeed the most shoe recommended to me is indeed the most suitable shoe for me to buy and not the one with suitable shoe for me to buy and not the one with the highest profit margin for the seller. the highest profit margin for the seller.

However, I do not trust when I assume in traffic However, I do not trust when I assume in traffic that other drivers will follow the rule of driving on that other drivers will follow the rule of driving on the right side of the road. No one would have an the right side of the road. No one would have an advantage by deviating from this rule. advantage by deviating from this rule.

Trust contains calculating considerations in Trust contains calculating considerations in the sense that I trust only when I actually the sense that I trust only when I actually think the think the „„trust-takertrust-taker”” will act as he promises. will act as he promises.

Social CapitalSocial Capital There are many possible approaches to defining There are many possible approaches to defining

social capital much to the exasperation of anyone social capital much to the exasperation of anyone trying to research it. However there is some trying to research it. However there is some consensus within the social sciences towards a consensus within the social sciences towards a definition that emphasises the role ofdefinition that emphasises the role of networks networks and and civic normscivic norms (Healy, 2001). (Healy, 2001).

Social capital is generally perceived to be a Social capital is generally perceived to be a private and public good (Putnam, 2000) because, private and public good (Putnam, 2000) because, through its creation as a by-product of social through its creation as a by-product of social relations, it benefits both the creator and relations, it benefits both the creator and bystander. bystander.

It is a classic public good because of its non-It is a classic public good because of its non-exclusivity - its benefits cannot be restricted and exclusivity - its benefits cannot be restricted and hence are available to all members of a hence are available to all members of a community indiscriminately (Woolcock, 2001).community indiscriminately (Woolcock, 2001).

The The ElementElements of Social Capitals of Social CapitalOObligations and expectations which bligations and expectations which

depend on the trustworthiness of the depend on the trustworthiness of the social environment, social environment,

TThe capacity of information to flow he capacity of information to flow through the social structure in order through the social structure in order to provide a basis for action and to provide a basis for action and

TThe presence of norms accompanied he presence of norms accompanied by effective sanctions.by effective sanctions.

((J.S. CJ.S. Colemanoleman, 1990, 1990))

The Baker’s dilemmaThe Baker’s dilemma The baker would The baker would

bake bread if the bake bread if the buyer paid first, buyer paid first, while the buyer while the buyer would be unwilling would be unwilling to pay before to pay before receiving the bread. receiving the bread. This is a real trapThis is a real trap..

TThere is no way out here is no way out without trust without trust

Why is trust more important in Why is trust more important in e-Society, e-Economy?e-Society, e-Economy?

The partners are The partners are unknownunknown (global (global players, infinite number players, infinite number of players)of players)

There are less filtration There are less filtration for newcomers (free for newcomers (free entry, low cost trading)entry, low cost trading)

TThe agreements are less he agreements are less regulated than in regulated than in traditional markets traditional markets

the contracts are never the contracts are never completely closedcompletely closed, and , and this is more risky among this is more risky among unknown partnersunknown partners

Simple model for Simple model for acaccidentalcidental transactionstransactions

SELLERSELLER

CCheats heats HonestHonest

BUYERBUYER

ControlsControlsDoes’nt controlDoes’nt control

It is easy to check that applying pure strategiesdoesn’t generate a Nash-equilibrium in the game.

So, both parties use mixed strategies, altering the two basic approaches, but in this casethe payoff is sub-optimal

IN C2C and (partly) B2C IN C2C and (partly) B2C

AAccidental transactionccidental transaction is more is more frequentfrequent

AcAccidental cidental transactions transactions deterioratedeteriorate the efficiency of the market. the efficiency of the market.

Two possible solutions for Two possible solutions for increasing the payoffsincreasing the payoffs

Transformation of one-shoot Transformation of one-shoot transaction for stable business transaction for stable business relationshiprelationship

Trust-enhancing institutions, which Trust-enhancing institutions, which make positive effect on the players make positive effect on the players behavior even in incidetntal behavior even in incidetntal transaction transaction

TTit-for-tat strategyit-for-tat strategy IIf the partner stands by the Pareto-f the partner stands by the Pareto-

optimal optimal solution solution (the seller (the seller is is correct correct and the buyer dand the buyer doesoes not control not control him him), ), so so his/her opponent also applies this his/her opponent also applies this advantageous strategy. advantageous strategy.

But if the partner deviates from it, But if the partner deviates from it, the other will behave adequately. the other will behave adequately. (In (In each given case only.)each given case only.)

Trigger strategyTrigger strategyThey choose a non-equilibrium pair of They choose a non-equilibrium pair of

strategies leading to Pareto-optimal outcome strategies leading to Pareto-optimal outcome (i.e. the seller is correct and the buyer does (i.e. the seller is correct and the buyer does not doubt this). In the case of this strategy not doubt this). In the case of this strategy the seller’s payoff is not lower and the the seller’s payoff is not lower and the buyer’s one is higher than it would be in buyer’s one is higher than it would be in Nash equilibrium. (Y-F, or U). Nash equilibrium. (Y-F, or U).

They employ this strategy in the first game They employ this strategy in the first game and continue to employ it until the other and continue to employ it until the other player deviates from itplayer deviates from it. (But in that last case . (But in that last case they can never return to the strategy they can never return to the strategy employed first.)employed first.)

TThe personal relational he personal relational networksnetworks

„„AA group of 1,000 people typically group of 1,000 people typically has connections to about 5 million has connections to about 5 million others. Information about how those others. Information about how those relationships interconnect is a relationships interconnect is a powerful but often overlooked powerful but often overlooked corporate asset. It's a valuable, corporate asset. It's a valuable, organic, living thing. It exists, but organic, living thing. It exists, but you can't tap into it.„you can't tap into it.„

((Antony Brydon, CEOAntony Brydon, CEO,, Visible Path Visible Path CorpCorp.).)

TThe mapping of personal he mapping of personal relational networksrelational networks

TThe mapping of personal relational networks he mapping of personal relational networks through the traffic generated by the through the traffic generated by the employees on intranets and the internet is employees on intranets and the internet is spreading in an ever widening circle. The spreading in an ever widening circle. The inclusion of personal relationships into the inclusion of personal relationships into the running of the firm is such a strong objective running of the firm is such a strong objective that numerous software (LexisNexis that numerous software (LexisNexis Interface, Contact Networks, etc.) have been Interface, Contact Networks, etc.) have been developed by now to efficiently map and to developed by now to efficiently map and to exploit in a business sense the personal exploit in a business sense the personal relationships of the firm’s employees (right relationships of the firm’s employees (right down to the doorman). down to the doorman). ((All of this, of course, raises great concerns in All of this, of course, raises great concerns in

regards to personal data, but it would lead us far regards to personal data, but it would lead us far away from the focus of our away from the focus of our presentationpresentation..))

Trust- enhancing Trust- enhancing mechanismsmechanisms

1.T1.Technical security of the transactionsechnical security of the transactions 2. 2. LLegal institutions applying sanctionsegal institutions applying sanctions 3. 3. SSocial mechanismsocial mechanisms

4. 4. PPersonal trust between partners ersonal trust between partners

Trust enhancing mechanisms Trust enhancing mechanisms existing in e-marketsexisting in e-markets

Mechanisms diminishing risks similar Mechanisms diminishing risks similar to the ones to the ones applied in traditional applied in traditional markets markets

But the weight and the forms of the But the weight and the forms of the particular mechanisms differ particular mechanisms differ significantly from the traditional significantly from the traditional forms forms

Some new trust enhancing Some new trust enhancing mechanisms also occure.mechanisms also occure.

What makes a difference?What makes a difference? Independent (not Independent (not

state-state-generatgenerateded/owned/owned) trust-building ) trust-building institutions have more opportunities to institutions have more opportunities to flourish in electronic commerce than flourish in electronic commerce than in traditional transactions.in traditional transactions.

In contrast of traditional trust-In contrast of traditional trust-enhancing institutions, which were enhancing institutions, which were produced by decades, sometimes by produced by decades, sometimes by centuries, the electronic versions centuries, the electronic versions ocure one day to another ocure one day to another

IInstitutionalization of buyers’ nstitutionalization of buyers’ solidaritysolidarity

The fact, that The fact, that buyers are buyers are no longer isolated has no longer isolated has fundamentally changed the fundamentally changed the nature of the market nature of the market transactionstransactions in electronic in electronic marketsmarkets

Reputation-building and -Reputation-building and -destroying institutionsdestroying institutions

Not only buyers, but also Not only buyers, but also experts give an opinion of experts give an opinion of the products which the products which contributes to diminishing contributes to diminishing the information asymmetry the information asymmetry

Intuit IncIntuit Inc. Case: . Case: the dynamism of the dynamism of trust-destroying actions trust-destroying actions

IIn the first days of 2003 n the first days of 2003 the company the company enraged enraged the whole Web as its the whole Web as its TurboTax software had TurboTax software had given trouble to some given trouble to some buyersbuyers..

They They immediately e-immediately e-mailed their complaints mailed their complaints to different Internet to different Internet forums. The speed of forums. The speed of the spread of the the spread of the critical remarks plunged critical remarks plunged the enterprise into crisisthe enterprise into crisis

The end of The end of buyers’ isolationbuyers’ isolation and and passivitypassivity

In Hungary we were also able to get a In Hungary we were also able to get a taste of this in a special field, namely in taste of this in a special field, namely in health care, which became involved in a health care, which became involved in a scandal centered around the website scandal centered around the website www.halapenz.hu. .

Patients share their information about the Patients share their information about the „standard honorarium” (or gratitude „standard honorarium” (or gratitude payment) forced to pay the doctors for payment) forced to pay the doctors for the „free” healthcarethe „free” healthcare

Price Price setting setting of eof exxppeeririenceence goods distributed on the goods distributed on the

WebWebMarket of Market of tangible tangible goods goods

Knowledge-Knowledge-community community

Knowledge-Knowledge-marketmarket

P = h (V) P = h (V) R = i (V) R = i (V) P = f (R)P = f (R)R = i (V) R = i (V)

Prices are Prices are fixed on the fixed on the basis of the basis of the value of the value of the good (or on good (or on the basis of the basis of the costs) the costs)

Reputation Reputation forms on the forms on the basis of the basis of the value of the value of the products products

Price depends Price depends on the on the reputation.reputation.Reputation is Reputation is based on the based on the value of the value of the goods. goods.

Further developments in trust-Further developments in trust-buildingbuilding

TTransactional history of ransactional history of each seller and buyer each seller and buyer

Due to this mechanism, Due to this mechanism, the individual actors’ the individual actors’ reputations are clearly reputations are clearly shown. shown.

This system in itself This system in itself incites the participants incites the participants to cooperate to cooperate and and contributes to the contributes to the improvement in the improvement in the quality of the goods. quality of the goods.