Information, Irrationality and the Evolution of Trust

Abstract

Trust is a central component of social and economic interactions among humans. While rational self-interest dictates that "investors" should not be trusting and "trustees" should not be trustworthy in one-shot anonymous interactions, behavioral experiments with the "trust game" have found that people are both. Here we show how an evolutionary framework can explain this seemingly irrational, altruistic behavior. When individuals' strategies evolve in a context in which (1) investors sometimes have knowledge about trustees before transactions occur and (2) trustees compete with each other for access to investors, natural selection can favor both trust and trustworthiness, even in the subset of interactions in which individuals interact anonymously. We investigate the effects of investors having \fuzzy minds" and making irrationally large demands, finding that both improve outcomes for investors but are not evolutionarily stable. Furthermore, we often find oscillations in trust and trustworthiness instead of convergence to a socially optimal stable equilibrium, with increasing trustworthiness preceding trust in these cycles. Finally, we show how "partner choice," or competition among trustees in small group settings, can lead to arbitrarily equitable distributions of the game's proceeds. To complement our theoretical analysis, we performed a novel behavioral experiment with a modified version of the trust game. Our evolutionary framework provides an ultimate mechanism - not just a proximate psychological explanation - for the emergence of trusting behavior and can explain why trust and trustworthiness are sometimes stable and other times unstable.

Keywords: trust, evolution, cooperation, reputation

JEL Classification: C7, C72, C73