An Experiment on Trust in Triads Werner Raub Workshop on Social Theory, Trust, Social Networks, and Social Capital II National Chengchi University – NCCU April 2011

1 Trust by Example I July 18, 2007: end date to purchase a copy of the first edition of Theory of Games and Economic Behavior by John von Neumann and Oskar Morgenstern at eBay from the seller “bibliomonster” for US-$ 1, The item had a fixed price listing (eBay’s “Buy It Now” option) and could only be purchased without bidding in an auction. Item description: “Bound in original publishers red cloth a bit rubbed at head of spine. Black (ink?) mark on top board. Minor shelf wear, else very good. Internally, clean and free of ink, marginalia and soiling. No dogeared pages or tears. Includes the often missing corrigenda leaf. A nice, collectable copy.”

2 Trust by Example II A potential buyer at eBay has to decide whether to buy the rare first edition of a book offered by a seller and to send the money The seller, after receiving the money, has to decide whether or not to ship the book to the buyer If the seller ships and the book corresponds with the specifications, both buyer and seller are happier after the deal than before the deal If the seller does not ship the book, he can try to sell it again, while the buyer has lost her money

3 The Trust Game Trustee/Seller Trustor/Buyer No trust Trust Honor Abuse S 1 < P 1 < R 1 P 2 < R 2 < T 2 No trustTrust AbuseHonor

4 Outline 1.Theory and hypotheses on embedded trust 2.Design of the experiment 3.Results 4.Related findings from other empirical studies using complementary research designs 5.Conclusions: ongoing and future research

5 Theory and Hypotheses on Embedded Trust

6 Trust problems (and other social and economic interactions) are often “embedded” in the sense of repeated transactions between the same actors actors encounter and exchange information with partners of their partner  need to extend predictions for trust situations to embedded settings (“trust in networks”)

7 Embeddedness Mechanisms Dyadic embeddedness Network embeddedness Learning Common history of past interactions: information about the partner from own experiences Information from third parties about their past experiences with the partner ControlExpected future interactions: opportunities for conditional cooperation via, e.g., “tit for tat” Opportunities for conditional cooperation involving third parties: “voice” (reputation effects)

8 Approach We distinguish between different embeddedness effects theoretically empirically We consider “games on networks” and neglect “strategic network formation”: embeddedness is exogenous in the experiment (but see concluding discussion) We focus on trust as a result of “enlightened self-interest” and neglect (more or less) “non-selfish utility”

9 Theories for Deriving Hypotheses on Embeddedness Effects Dyadic embeddedness Network embeddedness Learning Adaptive learning models; information diffusion models Learning and control Models for repeated games with incomplete information ControlModels for repeated games with complete information

10 Trust in Finitely Repeated Games with Incomplete Information: Intuition I Consider a finitely repeated Trust Game with a trustee who, with some positive (and possibly very small) probability, has no incentive to abuse trust in a one-shot Trust Game (e.g., “inequity aversion”) The trustee may then honor trust for one of two very different reasons: 1.No incentive to abuse trust in a one-shot Trust Game 2.Reputation building: if trust is abused, trustor can infer trustee’s type for sure (learning) and may never place trust again (control) Trustor may therefore be inclined to place trust

11 Trust in Finitely Repeated Games with Incomplete Information: Intuition II Thus: 1.Trustor tries to learn about and controls the trustee, taking the trustee’s incentives for reputation building into account 2.Trustee balances long-term effects of his reputation and short-term incentives for abusing trust, taking into account that the trustor anticipates this balancing Some properties of the equilibrium: 1.Trust is placed and honored in “early” rounds of the game 2.Actors randomize afterwards 3.Placed trust is abused in “final” rounds of the game 4.Once abused, trust is never placed again

12 Hypotheses – Summary Dyadic embeddedness Network embeddedness Learning Trust increases (decreases) with positive (negative) own experiences with the trustee Trust increases (decreases) with positive (negative) information on the trustee received from other trustors ControlTrust and trustworthiness increase with the likelihood of future interactions Trust and trustworthiness increase with the trustor’s control opportunities through her network with other trustors

13 Design of the Experiment

14 Lab Experiment Subjects play repeated Trust Games in the lab Anonymous interactions with actual other subjects in the lab Complete game structure provided in the instructions; no deception Points earned represent actual money for the subjects

15 Trust Game in the Lab Experiment Number of points A B down right A 10 B

16 Interaction Structure Two trustors play with the same trustee for 15 rounds (“triads”) In each round, trustor 1 plays first, trustor 2 second Depending on experimental condition: information exchange about past behavior between trustors Trustor 2 Trustee Trustor 1

17 Two Experimental Conditions No information exchange between trustors: each trustor only knows what happens in her own Trust Games with the trustee  opportunity for dyadic learning and control  no opportunity for network learning and control Full information exchange between trustors: after each Trust Game, also the trustor not involved in that game receives information on the choices made in that game  opportunity for dyadic learning and control  opportunity for network learning and control

18 Further Set-Up Both conditions: subjects know what kind of information everybody receives Each subject plays three repeated trust games in the same information condition: once as trustor 1, once as trustor 2, once as trustee Subjects are rematched between the repeated games; never rematched to other subjects they had already played with; subjects are informed on the rematching process Experiment conducted in ELSE lab of UU, using z- Tree software 72 subjects, i.e., data on 72 triads and 72x15x2 = 2160 Trust Games (1080 with and 1080 without information exchange between trustors)

19 Lab Experiment and Embeddedness Effects Lab experiment allows to test hypotheses on effects of dyadic embeddedness and network embeddedness on trust and trustworthiness

20 Results

21 Three-Level Logistic Regression Estimate probability to trust / honor trust conditional on past experiences, rounds to go, information condition Three-level random effects model: Levels: decision – trustor – triad 2160 decisions by 144 trustors in 72 triads 1542 decisions by 72 trustees in 72 triads Clustering within trustors in different series of games neglected Trustor level variance is small Results are rather robust for the specification of random structure

22 Results: Effects of Embeddedness on Trust of the Trustor 144 trustors

23 Results: Effects of Dyadic Embeddedness on Trust of the Trustor Support for hypotheses on dyadic learning and on dyadic control effects on trustor behavior: Trustors are more (less) likely to trust… after having experienced more honored (abused) trust in own interactions with trustee (dyadic learning) the larger (smaller) the number of rounds still to be played (also: strong endgame effect) (dyadic control)

24 Results: Effects of Network Embeddedness on Trust of the Trustor Evidence for network learning effects on trustor behavior: trustors are more (less) likely to trust after having observed more honored (abused) trust in the other trustor’s interactions with the trustee No evidence for network control effects on trustor behavior: no main effect of information condition; no interaction effect of information condition with rounds still to be played; decrease of trust does not start later in condition with full information exchange between trustors

25 Results: Effects of Embeddedness on Trustworthiness of theTrustee Proportion honored trust Round no info full info 72 trustees

26 Results: Effects of Dyadic Embeddedness on Trustworthiness of the Trustee Support for hypothesis on dyadic control effects on trustee behavior: Trustees are more likely to honor trust the larger the number of rounds still to be played with the respective trustor Also: strong endgame effect

27 Results: Effects of Network Embeddedness on Trustworthiness of the Trustee Support for hypothesis on network control effects on trustee behavior: Positive effect of full information condition on likelihood of honoring trust Endgame effect stronger for interactions with trustor 2 (who has less control opportunities than trustor 1)

28 Puzzle Trustee reacts to trustor’s opportunities for dyadic control and network control  Trustee seemingly takes reputation effects of his behavior into account Trustor reacts to her own opportunities for dyadic control Trustor does not react to her own opportunities for network control

29 Related Findings from Other Empirical Studies Using Complementary Research Designs

30 Evidence on Embeddedness Effects from Complementary Research Designs Approach: use complementary research designs (survey, vignette study, lab experiment) for multiple tests of the same hypotheses (cf.: triangulation, cross validation) Similar perspective: Sociology: J.H. Goldthorpe (1996) The Quantitative Analysis of Large-scale Data Sets and Rational Action Theory: For a Sociological Alliance, ESR 12 Economics: G.W. Harrison & J.L. List (2004) Field Experiments, JEL 42(4)

31 Alternative Designs: Advantages and Disadvantages AdvantagesDisadvantages SurveyActual interactions Measurement problems; less control over variables Lab experiment Control over incentives and embeddedness variables Abstract; external validity Vignette study Less abstract than lab experiments; control over variables Hypothetical interactions; lack of “incentive compatibility”

32 Summary of Empirical Evidence Survey Vignette study Lab experiment Dyadic learning Consistent support for dyadic learning and control effects on trust of trustor Quite some support for dyadic control effects on trustworthiness of trustee Dyadic control Network learning Consistent support for network learning effects on trust of trustor No support for network control effects on trust of trustor Consistent support for network control effects on trustworthiness of trustee Network control

33 Once Again the Puzzle Trustee reacts to trustor’s opportunities for dyadic control and network control  Trustee seemingly takes reputation effects of his behavior into account Trustor reacts to her own opportunities for dyadic control Trustor does not react to her own opportunities for network control

34 How (not) to Explain the Puzzle? Data and/or measurement problems (including sample selectivity and endogeneity of network embeddedness) could be (part of) the reason why we do not find network control effects on trustor behavior in survey data (see Buskens 2002) Data and/or measurement problems are much less plausible reasons for the lack of network control effects on trustor behavior in the experiment

35 How to Explain the Puzzle: Limits of Strategic Rationality? General idea: Trustor anticipation on her own opportunities for network control involves too many steps of iterated reasoning, at least for inexperienced subjects Network control effects on trustee behavior require only that trustee anticipates that own present behavior affects future trust of the present or other trustors Network control effects on trustor behavior require that trustor anticipates that the trustee anticipates on effects of his present behavior on future trust of other trustors

36 Similar Arguments in the Literature Equilibrium behavior becomes less likely when actors have to reason many steps ahead Equilibrium behavior requires that actors are sufficiently “experienced” (see, e.g., Binmore, Camerer, Kreps)

37 Conclusions: Ongoing and Future Research

38 Testable Implications of the Explanation of the Puzzle and Empirical Evidence In the experiment, trustors who have been in the role of trustee in an earlier game (and thus have more experience) should be more likely to react to network control opportunities. There is some support for this effect in our data. We also find support for network control effects on trustor behavior in one of our vignette studies with experienced subjects (purchase managers) in the trustor role.

39 Extended Version of Our Experiment: Some Preliminary Evidence for Experience Effects I We meanwhile repeated the experiment with subjects playing 6 rather than 3 repeated trust games Each subject was twice in each role (trustor 1, trustor 2, trustee) 138 subjects, data on trust games First question: is there evidence for experience effects in the sense that behavior in later repeated trust games differs from behavior in earlier repeated trust games?

40 Extended Version of Our Experiment: Some Preliminary Evidence for Experience Effects II

41 Related Empirical Evidence from Other Research Professionals tend to implement relatively complex equilibrium behavior as well as equilibrium behavior that requires quite some iterated reasoning, also in situations where non-professionals fail to do so: Professional soccer players (versus college students) in zero-sum games such as penalty kicks (but also strategically equivalent lab experiments): Palacios-Huerta & Volij; Berger & Hammer Chess Grandmasters versus college students in the Centipede Game: Palacios-Huerta & Volij Related empirical evidence on “spillover effects” between games (Bednar et al.)

42 Further Extension: Investments in Embeddedness and Strategic Network Formation I Embeddedness is exogenous in the experiment Consider an alternative scenario: before playing the repeated Trust Games, subjects themselves decide to play in one of the two information exchange conditions. Playing in “full information exchange between trustors” is costly Thus, the alternative scenario includes strategic network formation: subjects can invest in network embeddedness

43 Further Extension: Investments in Embeddedness and Strategic Network Formation II The alternative scenario allows for an analysis of strategic network formation under the assumption of full strategic rationality Questions: Effects of game parameters (payoffs, # of rounds of the repeated trust game)? Effects of “who can invest in network embeddedness (trustors or trustee)?”

44 Further Extension: Investments in Embeddedness and Strategic Network Formation III Theoretical approach Calculate expected payoffs in equilibrium for the two conditions (“no information exchange between trustors” vs. “full information exchange between trustors”) Difference = willingness to pay Issue: possible signaling effects if trustee can invest in embeddedness

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46 Additional Slides

47 Further Details on the Experiment Sessions took between 55 and 70 minutes. Subjects’ earnings Average: € € in condition without information exchange € in condition with full information exchange Minimum earnings: € 7.00 Maximum earnings: € 12.40

48 Comparison of the Design with Bolton et al (BKO 04) and Bolton & Ockenfels 2009 (B&O 09) “No information exchange between trustors” resembles the “partners market” in BKO 04 and B&O 09 “Full information exchange between trustors” combines dyadic embeddedness and network embeddedness and thus differs from the “reputation market” in BKO 04 and B&O 09 that represents exclusively a form of network embeddedness BKO 04 and B&O 09 has no condition that combines dyadic and network embeddedness Our experiment neglects the “strangers market” in BKO 04 and B&O 09

49 Trust Problems as Social Dilemmas The buyer (trustor) has to trust the seller (trustee) that he ships the book and that the book corresponds with the specifications The trustee has an incentive to abuse trust This may induce the trustor not to place trust in the first place Placed and honored trust is better for both actors than no trust. Hence, trust problems as an example of social dilemmas: goal-directed behavior leads to ‘poor’ outcomes (‘unintended consequences’)

50 Trust Problems as a Sociological Problem Problem of social order Trust problems in economic exchange: (e.g., buyer-supplier, R&D-alliances) Trust problems in social exchange (e.g., help among friends)

51 Results: Effects on Trust Information conditionNo net effect Abused own trust in past− Honored own trust in past+ Abused other trust in past− Honored other trust in past+ Rounds to go+ Rounds to go × information0 Round 14− Round 15− Info cond × round 140 Info cond × round 15−

52 Results: Effects on Trustworthiness Information condition+ Rounds to go+ Rounds to go × information− Round 14− Round 15− Info cond × round 14 × trustor 2− Info cond × round 15 × trustor 2−

53 Results: Effects on Trust

54 Results: Effects on Trustworthiness

55 Results: Experience Effects