Thursday, January 3, 2013


72. Uncertainty and openness

Trust pricks up its ears when expectations are disappointed. What is going on? The problem is that when expectations are disappointed, the cause is often ambiguous. What went wrong? Was there a misunderstanding in expectations? Was there an accident that was none on the trustee’s fault and prevented him/her from acting as expected? Was his/her competence less than thought? Did he/she not pay attention; was there lack of commitment? Or was he/she deliberately taking opportunistic advantage at the expense of the trustor? This is the causal ambiguity of trust. Often one cannot establish what cause is at work, for lack of information or ability to interpret what happens. Especially the opportunist will claim a mishap for an excuse.

When the trustor is under pressure or lacks self-confidence or is inclined to distrust he/she may jump to the worst conclusion, that of opportunism. If the trustee is in fact reliable, he should therefore when making a mistake or incurring an accident immediately report it, explain what happened, announce his commitment to immediately try to mitigate the problem, and promise that after the crisis he/she will engage in deliberation about how such problems may be prevented in the future. That is trustworthy conduct. In other words, the problem of causal ambiguity yields the need for openness about failures. Secrecy does not pay. The trustor will conclude that the trustee acted opportunistically, because if not, why didn’t he/she come clean earlier, and help to solve the problem?

Take the bankers. Many people say that the bankers should have apologized for the financial crisis. But such apology alone is cheap. One should add what I just indicated: clarification of the causes, attempts to redress the problem, and commitment and deliberation for future prevention. Since the bankers did not do any of that all trust in them was destroyed. The conclusion was that they acted deliberately and opportunistically. 

The reverse side of this coin is that when something goes wrong the trustor should not jump to the conclusion that the trustee is opportunistic, but should extend the benefit of the doubt to the trustee and let him/her explain. Here empathy also comes in: the trustor should put him/herself in the shoes of the trustee, to try and understand what was going on.

There are further arguments for openness for the sake of trust. Not only should the trustee be open about his/her failures, the trustor should also be open to the trustee about his fears concerning the relationship. That gives the trustee the opportunity to try and reduce the risk involved. Secrecy robs the partner of opportunities to help. Good negotiation is not seeking to yield as little information and advantage as possible, as instinct may dictate, but to seek out problems on the part of the partner that carry great weight for him/her, and see if one can prevent or mitigate the problems at comparatively low cost. If the partner does the same, then in this give and take both partners will flourish.   


9 comments:

  1. It is often not lack of information from the trustee but information marked by probable, uncertain, contrary, contradictory or unclear meanings that can be felt like potential sources of psychological discomfort or threat by the trustor. When it is beyond the control of the trustee to deal with certain vital elements that are missing and this has an immediate effect on the trustor, he/she may have a problem in finding a plausible reason to believe that problems might be prevented in future. Openess as such does not reduce the risk or restore trust. Negotiation is only possible when things are open for negotiating.

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  2. Fransje, I think you are quite right. Openness is not helpful if it only displays confusion, doubt, or ignorance and therefore cannot satisfy the trustor's demand for clarity, certainty and security.

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  3. Bart, do you have an idea why bankers react like they mostly did? Was it arrogance? Did'nt they understand their new situation? It is a miracle to me that no banker was arrested until now. Is the situation too hot to handle or are we afraid for a total landslide? I strongly have the impression that banks returned to business as usual and they spread the risks and costs of Basel III on their clients.
    What are the hidden costs for society for a behaviour like that. This remarks do not concern the core of your text, but the situation is fascinating for me and many others I expect.

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    2. Noud, I think your description is accurate. How to explain it? That is fairly complicated. I will need almost as much as a full item in this blog. There are problems on three levels, and they reinforce each other. For levels of trust, see item 68 of this blog. Here, the levels are those of the individual banker, the bank and the wider financial-political system.

      Individual bankers have been schooled in the idea that self-interest drives the economy. They neglect that Adam Smith, the godfather of economics, made individual self-interest subservient to wider, collective interest. For a discussion of this see item 54 of this blog. Self-interest has subsequently deteriorated into pure, arrogant, blind, intoxicating, and ruthless greed, among bankers and, increasingly, managers.

      On the level of banks we find the immorality of groups, discussed in item 48 of this blog. In particular, there are prisoner’s dilemmas: some bankers and banks may want to behave more responsibly but they can afford to do so only if their competitors do the same, and since they all argue like that nothing happens and they continue their misconduct.

      On the level of the system we find moral hazard: while finance should be balancing risk and returns, big banks can hive of the risks of default onto society because they are ‘too big to fail’ and governments see themselves forced to bail them out. A second problem on the system level is the connection between government and banks in personnel: bankers become ministers of finance or advisers, and when they are done they return to banking. This yields a powerful lobby for banking interests. A third problem is that governments are themselves involved in a prisoner’s dilemma: they would like to restrain banks more but are afraid of scaring away their national banking sector, and can afford to so only when other countries do so as well. There is a need for joint action, and that is attempted in the so-called Basel agreements. However, that is not fully effective until it is global, and then still does not solve all problems.

      What can be done? People should no longer accept their governments to deal too softly with banks. They should protest more, creating political capital for political parties that are committed to stronger action, and then vote for those parties.

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  4. Bart, thank you for this extensive reaction. Maybe another thing normal people can do is forget about banks and organize their own money cyclus on a more local scale, pay of their debts. By working more and more in a shadow economy (grey/black?) they can keep their money in their own region and so they will be more resilient to future crises.

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    1. Dommelsche kracht, Perhaps that is a way out. A financial economist might say that on such a limited, local level money will not easily find the most profitable investment. But on the other hand, on a local, personal basis, with a lot of social control, defaults and hence risk of investment may also be less.

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  5. Maybe looking for the most profitable investment has created a situation without ceiling. And profitable for who? When I buy a Christmas tree in my neighborhood the money stays here for some time instead of going to the owners of Gamma, Karwei etc.

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    1. Noud, I was thinking of a local provider of money for a risky local venture. Surely, he/she will want to see some return on that. How many people will provide money without that?

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