What the Sharing Economy Tells Us about Trust
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Contributor / Brayden King
Max McGraw Chair of Management and the Environment
Professor of Management and Organizations
Chair of Management & Organizations Department
Kellogg School of Management / Sharing Economy
Risk skyrockets when it involves your personal belongings, like your home, car, or couch. Yet, in today’s sharing economy, it’s commonplace for people to take risks regarding the most vulnerable elements of their everyday life. King explains how, with ratings systems in place, leading companies like Uber have been able to grow rapidly, even with little to no regulation mitigating the risks. This is largely due to a reliance on reputation as a key incentive for people to behave well and build trust in the process.
Transcript
The sharing economy, people are asking other people to share important things with them—a home, a couch, a car, anything that you normally use personally for yourself.
And so, the risk is that if you’re sharing with somebody, they’re going to misuse it, they’re going to break your things, they’re going to do something that you don’t want to happen at your home.
And so, it really requires that people trust one another to take care of their personal goods, their services, and know they’re not going to take advantage of them.
So, trust, I think of as the grease that gets the wheels turning in the sharing economy. Without trust, it’s impossible for people to be—or, it’d be very difficult for people to actually give and share their personal items with one another, or their time.
Reputation is sort of this idea that “I can trust you because I know that other people have trusted you in the past.”
So, when you have a good reputation and it shows up in these rating systems, then people are more likely to trust one another and are willing to give of their time and home and car—whatever it may be.
And the people in the sharing economy have figured out very nice ways to get that reputation out there—they’ve created rating systems, they’ve created feedback loops.
And if you do something that would make you untrustworthy, it shows up pretty quickly in those rating systems.
Bumper: With Reputation and Trust, Who Needs Regulation?
Well, the sharing economy companies like Airbnb or Uber have really wanted to avoid being regulated as much as possible.
And the reason for that is because they feel like trust and reputation end up being proxies that keep people’s behavior in line and that if you try to overregulate it, it’s just going to increase costs and make it difficult for them to compete with regular services like hotels or taxi companies.
So, they really see trust and reputation as a proxy for regulation and making it unnecessary to do that at all.
Now, there’s clearly some people who are uncertain about that, and it usually arises when there’s a problem that occurs despite the fact that you have these reputational measures in place.
Take, for instance, Uber, which has had a history of complaints coming up where drivers have abused the privilege.
When something terrible happens, then obviously people begin discussing whether regulation would be a better alternative than simply relying on reputation and trust.
You know that if you are a user of Airbnb and you’re a guest at someone’s house, if you have a big party there and break all their stuff, then chances are it’s going to get reflected in your rating, your reputation, and there’s going to be a penalty attached to you, a stigma attached to you.
And in the future, it may be much more difficult for you to get the house, to get the room that you want.
So, typically, those things—reputation—make people behave well, and it makes them more trustworthy.
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Jacked Up Ratings: Problems with Quantifying Trust
One of the things that happens is, as we rely on quantitative measure of underlying features, like a quantitative measure or score that measures somebody’s creditworthiness or how trustworthy they are.
As these scores become consequential, as people start to take them seriously, and as they are used in actual important decision-making, there’s an incentive for people to corrupt them, to game them, to stop paying attention to what it is they’re measuring and instead focus on the measure.
And there are a couple of really clear examples of this becoming a big problem.
And one was, in 2008, people realized that the bond rating scores that had been attached by Moody’s and S&P and Fitch and whatnot, and that were attached to asset-backed securities based on subprime mortgages.
That the investment bankers and the rating agencies worked together to try to jack up the ratings as high as possible so that whenever outside investors looked at a security, they saw, “Oh, it’s AAA. Well, that’s great.”
Had they been savvy (and now they’re very savvy because they know what the problem is), they might have realized that, in fact, that AAA rating was a score that was kind of jacked up.
And so, I think in a world in which the quantitative information becomes increasingly important, what you have to do is be a sophisticated consumer of numbers and always be mindful of their limits and vulnerabilities. And you simply cannot take them too seriously.
BUMPER: Re-Engineering Trust with Peer-to-Peer Lending
Peer-to-peer lending is a very interesting experiment that, again, takes advantage of the IT revolution.
It used to be that if you were going to do peer-to-peer lending, it was going to happen in your small hometown. Those were your peers.
Those were the people who could trust you, who knew about your business, who might be willing to lend to you or whose business you knew about and to whom you might be willing to lend.
And what we’ve done is, we’ve sort of disconnected what used to be the high correlation between social knowledge and geographic concentration.
And so, peer-to-peer and similar models are re-engineering some of the differences between relational lending and relational trust and generalized trust in very interesting ways.
It’s a re-articulation of the connection between personal and impersonal. It’s a way of saying, “We can personalize what would otherwise be a default impersonal situation. We can create peers out of people that aren’t even in the same country.
Regulating Trust: Love It or Hate It?
When we think about trust in the marketplace, we’re usually thinking about trust between the buyer and the seller and, do I trust you enough to give you money so that when you give me a product or when you provide a service, that it’s going to be good?
But there’s another level of trust that exists in exchange relationships, and that’s trust in the context in which the exchange occurs.
There’s a lot of research on the relationship between institutional trust and individual trust, and some research suggests that the more institutional trust exists, the less people feel like they have to build trusting relationships, because they’re protected by the institution.
But there’s also research that suggests that the more we trust in institutions, that provides a useful foundation for building even stronger trust with exchange partners. And the jury is still out on which is true and which isn’t.
A lot of firms don’t like to be monitored by professional associations, and they don’t like rules and laws that keep them from doing things that they might want to do with customers, and those laws and rules can make companies be less efficient and less profitable.
But they can also enhance the trust that the customer has in the institutions that protect trust and without them, the consumer may not want to engage with firms in the entire category.
And this is particularly relevant for new industries. We hear a lot about the sharing economy. One of the problems about some companies that operate in the sharing economy is that these institutions don’t necessarily exist which protect consumers from these problems.
If you’re working in a sector where there isn’t institutional trust, you have to build your trust one person at a time. At the grassroots level. And it seems like, for some of the companies that are operating in the sharing company, that if they do that and they start to build a critical mass, then the critical mass of trust within a particular social network serves as a certain institutional trust.
BUMPER: When Trust Makes Things Too Easy
Based on the research that I’ve done with a colleague in the mountain climbing industry, it seems that as consumers, when we’re going about our daily decision-making process, we sometimes are willing to place faith in institutions without necessarily knowing what those institutions do and without investigating.
So, the FDA — people think, “Oh, well, I’m going to buy this new product because the FDA approved it.” But there are lots of people who think the FDA is not very trustworthy. And there are reasons to maybe think that in certain product categories.
But many people still sort of, almost without thinking about it—it makes things easy. As I mentioned, institutional trust makes things easy for consumers. They believe, “OK, well I can trust this,” when that trust is misplaced.
And the amount of implicit trust (let me put it this way), the amount of implicit trust that exists in the institution of guiding and maybe in the professional associations that monitor is amazing to me as someone who doesn’t climb mountains.
They say, “Well, I went to a website, and I found this person, and my friend says they’re good, so I signed up for them to give them 60,000 dollars, to have them take me to the highest peak in the world where I might die.” And they’re still willing to place trust.
Differentiating Trust and Trustworthiness: A Sociologist’s Perspective
And you might kind of wonder, well, trust sounds a bit like faith? You know, we’re just going to take people on faith.
And don’t we have a bunch of ways of coordinating our activity and making sure that the left hand knows what the right hand is doing, and I can figure out what’s going on vis-a-vis my employer or all the people that I interact with — and don’t we have a bunch of formal coordination devices like contracts or instructions or standard operating procedures?
Why aren’t those good enough? Why do we have to go beyond that and trust people? And there’s a couple of reasons for this. And one of them is that, as wonderful as these formal devices are, they really do have limits.
And one of the reasons is that contracts and other instructions, lists, standard operating procedures, all of these devices — they’re always incomplete; that is, the world is more complicated and unpredictable than we can anticipate.
And so, stuff will happen that will effect whatever it is you’re doing with these other people. It will have an impact on your ability to execute whatever it is you’re trying to do, and it’s not going to be in the contract what’s up.
You might think to yourself, “Well, maybe trust isn’t such an issue if we go to the marketplace.” Let’s think about markets and capitalism and self-interest and competition — maybe that’s a world in which contracts and other formal devices will be sufficient.
And once you’ve got an airtight contract, you don’t have to worry about the personal character or the trustworthiness of the people you’re dealing with, because you’ve got a good contract and you hired a good lawyer.
So, the most famous person who thought about this sphere, of course, was Adam Smith in his famous book The Wealth of Nations, which really did talk about the virtues of capitalist production and competitive markets and so forth.
And I think it’s very telling that before he wrote The Wealth of Nations, Adam Smith wrote a book on The Theory of Moral Sentiments.
And in this previous book, he posited that people are linked through strong bonds of sympathy and empathy and trust, and that on top of this, we’re able to have markets and capitalism and all that kind of fun stuff.
It was clear to me (and I think clear to Smith) that some measure of some baseline, some foundation of trust is very important even in social settings where we might think that the issue of trust can be solved or avoided.
You might want to ask, when does trust arise? I’ve talked about it as kind of ever-present — it’s all over the place. But really, there’s two elements that drive trust situations.
One of them is uncertainty, and the other is vulnerability — that is, people are uncertain about what others are going to do (they don’t know what’s going to happen in the future), and they’re vulnerable to what those other people do to the extent that their interests and those other people’s actions are intertwined.
So, the trick for dealing with a trust situation is really addressing these two key elements: either trying to deal with uncertainty by acquiring more information and learning (or trying to figure out) what is likely to happen in the future.
…Or by managing your vulnerabilities and thinking about ways to mitigate or reduce the impact (or the potential harm) that others’ actions, future actions, could have on your interests.
So, this kind of sets up a generic recipe book for how to deal with trust situations. How do people trust?
People rely on a lot of heuristics, rules of thumb, to decide who is trustworthy and who is not, and that distinction is really important because you can’t go through the world trusting everyone, and you can’t function in the world if you trust no one.
And so, what you have to do at the simplest level, is kind of put everyone into two bins: there’s people that are trustworthy; there is people who are not. And you want to be able to trust the trustworthy and avoid those who are not trustworthy
I’m going to offer a couple of distinctions that help clarify the discussion of trust. And one of them is the difference between trust and trustworthiness. And this really speaks to who is doing the trusting and who is being trusted.
One party trusts the other, and the other party may or may not be trustworthy — that is, they deserve the trust. But someone who is trustworthy may not be trusted, and someone who is trusting may end up trusting someone who is not trustworthy.
So, these two things have to be kept separate. Another distinction is the distinction between generalized and relational trust.
Generalized trust really speaks to the question of how you deal with strangers. Do you trust abstract institutions? Do you trust the average citizen that you might run into on the street?
That kind of a thing — where you’re really dealing with someone with whom you have no relationship and about whom you have no prior information. What kind of ambient or generic level of trust do you have?
Relational trust is, what happens after you start to get to know someone? What happens after you start to develop a social relationship?
You have a history together; you have contracts; you have prior transactions. That is a very particular and non-anonymous form of trust, and it is really driven by the nature of the interaction that you have with that individual.