Trust
as the Foundational Economic
Exchange Principle
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
1 settembre 2008, Roma
el Sehity, Castelfranchi, Falcone
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Our questions:
How does Money impact on Trust relationships?
What kinds of Trust does Money require?
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 α relevant for the result
(goal) g – Trust (X Y τ)
• First, one trusts another only relative to some goal
• Second, trust itself consists of beliefs
1 settembre 2008, Roma
el Sehity, Castelfranchi, Falcone
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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:
1 settembre 2008, Roma
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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
1 settembre 2008, Roma
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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
1 settembre 2008, Roma
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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
• Buyer‘s Mind (X)
• Seller‘s Mind (Y)
Like in barter, in order to buy Y‘s
good, H has to trust:
To sell his/her good,
1) Y‘s Willingness, Motivation
Belief, Skills and Competence
1) Y‘s goods: not only is Y reliable
but the quality of the good has
to be good
Y does not need to trust X‘s
Willingness, Motivation Belief,
Skills and Competence
Because it is sufficient to trust
that X‘s money is real money,
useful for any future
exchange
(caveat emptor)
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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.
=> a strange kind of three party trust emerges:
1 settembre 2008, Roma
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Trusting the Money Token (2/2)
• Three party trust:
1) Y trusts X as for giving him/her what X promised
(being reliable, willing and honest)
2) Then y is trusting the money issuing authority, a trust
which is not very explicit and conscious because
3) Y trusts the money token per se as being good
(money).
1 settembre 2008, Roma
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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:
1 settembre 2008, Roma
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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
1 settembre 2008, Roma
el Sehity, Castelfranchi, Falcone
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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 institution‘s 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.
1 settembre 2008, Roma
el Sehity, Castelfranchi, Falcone
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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 => This necessary is less than the proclaimed value
by the seller)
– Further, the buyer also pays with anxiety, trust effort, etc.
(costs)
– > 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)
1 settembre 2008, Roma
el Sehity, Castelfranchi, Falcone
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Stop?
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el Sehity, Castelfranchi, Falcone
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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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