The Effect of Real Options on Trust and Trustworthiness: The Relevance of Irrelevant Alternatives

23 Pages Posted: 6 Jun 2005

See all articles by Deepak K. Malhotra

Deepak K. Malhotra

Harvard Business School - Negotiation, Organizations & Markets Unit

Date Written: February 2005

Abstract

The study examines the effect of outside options on trust and trustworthiness. Building on the logic of self-justification and escalation, it is hypothesized that parties who have invested in outside options will behave in a less trustworthy (and more self-serving) manner with their exchange partners than will those who have not invested - even when the outside options are inferior and thus irrelevant. Thus, the existence of sunk costs, and not the mere presence of outside options, might lead to non-reciprocity by trusted parties. It is further hypothesized that trustors will not be sensitive to these effects of real options on trusted parties, and will not adjust their level of trust appropriately, leaving themselves vulnerable to exploitation. The hypotheses are tested and confirmed in an experiment using modified versions of the Trust Game (cf., Berg, Dikhaut, & McCabe, 1995). Strategic and theoretical implications are discussed.

Keywords: Trust, Real Options, Trustworthiness

Suggested Citation

Malhotra, Deepak K., The Effect of Real Options on Trust and Trustworthiness: The Relevance of Irrelevant Alternatives (February 2005). IACM 18th Annual Conference. Available at SSRN: https://ssrn.com/abstract=735084 or http://dx.doi.org/10.2139/ssrn.735084

Deepak K. Malhotra (Contact Author)

Harvard Business School - Negotiation, Organizations & Markets Unit ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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