Behavioral Economics for Trust

Has anyone broken your trust?

The answer is a definite yes for anyone.

Let’s not get started on how horrible that feels. It would have made your heart sink and made you feel like a total fool.

Strangely, it happens to all of us. I think we have a trust issue that needs to take care of.

The only smart way to deal with all these trust issues is to simply trust intelligently. That is a fancy way of saying that you should trust people who are evincing competence, honesty, and reliability and mistrust people who lack these.

When you think much about it, there isn’t anything more to do about it. You can’t go around trusting or mistrusting everyone.

So the only solution is to have a better judgment of whom to trust and not.

The problem here is that most people end it right there. Just walking off saying develop better judgment, then you can start trusting the right people is not helpful. We need to explore the right tools that could help us make the right judgments and understand our limitations in making good judgments.

Let’s start from square one, shall we?

Table of Contents

What is Trust?

trust – /trʌst/ – noun
Firm belief in the reliability, truth, or ability of someone or something.

What is the problem?

The problem is the word reliability in the definition.

“All of us are imperfect human beings living in an imperfect world.”

Haruki Murakami

We make horrendous mistakes as go on in our life. That is why we are not reliable and therefore not trustworthy.

What is the solution?

The solution, as everyone says, is to intelligently trust people. This means understanding our shortcomings and biases in deciding and get better at it.

So what we need to do here is to understand our shortcomings and biases and to act according. This is the point where I had the revelation of using behavioral economics to help us. I felt that some behavioral economics heuristics can also become applicable for trust.

We shall discuss some heuristics that I felt could be extended in understanding our behavior and biases in trust as well.

Prospect theory

Psychologists Daniel Kahneman and Amos Tversky in 1979 proposed the prospect theory, and later in 2002, Kahneman was awarded the Nobel Prize in economics for it. From the prospect theory, we will focus on Loss aversion for now.

Loss Aversion

Normally we assume that our emotional response to gains and losses is linear. Meaning that we think we feel the amount of pain in losing 100 bucks and the amount of happiness in gaining 100 bucks is the same. Except they are not.

Evolution has placed greater significance on losses than on gain. It was more costly for us to lose a meal than the advantage of getting an extra meal. This bias has made us more prone to losses than gains.

The below graph explains just that.

Loss Aversion

For a gain of x2, we have a perceived value of y2. But for a loss of x2, the perceived value is not y2, it is y3. Losses appear bigger to us than equal gain. I hope this is clear.

Now the question is, how is this relevant in trust?

Loss Aversion on Trust

Similar to loss aversion from behavioral economics, trust doesn’t follow a linear path as well. Our feeling is more subjected to mistrust than trust.

If we look at the graph below, we can see that it is harder for us to gain trust and so easy to lose it. It takes years to build trust and often seconds to lose it. Therefore, it is easier to get that mischievous tag than that reliable tag.

Behavioral Economics for Trust
Loss Aversion on Trust

Next time, when someone gets mad at you for that mistake you made one time despite everything good you have done, please understand that they are not being unreasonable. It is because the perceived value of that one mistake is greater than the goodness.

Confirmation Bias

Confirmation bias is our tendency to search for, interpret, favor and recall pieces of information that confirms our decisions or believes. This cognitive bias is our ego wanting to shout ‘I’m right!’. So we all have differences in our opinions and have different prejudices.

Confirmation Bias on Trust

You might have guessed by now how these biases affect our trust. We might have prior experience of trust or mistrust with certain types of people, which creates a bias for or against them. We might assume that certain types of people can be trusted or mistrusted. The confirmation bias validates these crazy assumptions and you might end up being unreasonably judgemental. Whether we trust someone shouldn’t be based on our biases but reasons.


Before you trust or mistrust someone, ask yourself, do you have enough objective evidence to believe so? Don’t let your decision cause people to shout in the streets with pluck cards saying, Black Lives Matter.

Gambler’s Fallacy

Gambler’s Fallacy or Monte Carlo fallacy is the false belief that an independent event will be likely to occur again in the future if it has been frequently occurring in the past.

A simple example will clear everything. If I toss a coin thrice and it all landed heads. If you were to make a bet on my fourth coin toss, would choose head or tail? You would bet on heads because it has happened thrice, so it might happen again.

Gambler’s Fallacy on Trust

Gambler’s fallacy on trust can be framed as we will trust or mistrust someone bases on our prior experience. This makes sense when these are dependent events meaning with the same person. It makes no sense to trust someone if they have been cheating you. But this approach won’t be sensible when they are unrelated. You shouldn’t mistrust a stranger or your friends, because someone else cheated you.


It is easier to doubt everyone when someone broke your trust and blindly trust everyone when your friends have been loyal to you. But make sure you are treating independent events independently and base everything on your intelligence and not emotions.


All I wanted to do here was rather than just winding up saying trust intelligently, I wanted to explore options that could help us make better choices in trusting people. I know these are not enough and we are just scratching the surface, but it will be better than nothing and being clueless.

Trust is a complicated issue, and we have to figure out what works best for us. Hopefully, you at least now know that there are some tools to help you out if it all seems unbearable. Otherwise, let’s settle for the fact that you learned a thing or two about behavioral economics.

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