The Cycle of Distrust

Chapter 12 The Cycle of Distrust

Why We Don’t Believe What Marketers Tell Us

I’m not sure about you, but I get a lot of spam e-mail. People are constantly offering me the chance to make a lot of money or buy cheap software. They tell me I’m the one person they’ve always wanted to meet. They offer to enlarge or improve different parts of my body. I was even presented with the opportunity to get another Ph.D.—one that would not require another five years of hard labor. Instead, they would credit me for my life experience. So far, this is the only one that I’ve tried out. But after I contacted the organization offering this degree, they decided to drop me from their list of interested prospective students. Sadly, I never did get credit for my life experience.

Beyond spam, I get a lot of other proposals and requests. I was particularly curious about one that came from my local cable company. It promised one month of free digital cable. Since I’m interested in any offer that has the word free in it (see Chapter 3, “The Cost of Zero Cost”), I decided to take this one on. I called the company, and in a matter of days, a technician came to my house and installed my free digital cable. A month later, I received a bill for the free digital cable and found that it actually cost $60. When I called the customer service department, the nice fellow who took my call patiently explained that, unfortunately, I had problems with reading comprehension. He pointed out that the terms of the agreement were clearly explained in the seven-point font at the bottom of the company’s ad. After I paid for the regular analog service, the box, the connection fee, and the remote, it said, I would “get for free” the difference between that amount ($60) and the standard amount ($79) for digital cable.

I generally consider myself a fairly trusting person, but with all the dubious offers and news about the bad behavior of businesses, I feel myself becoming less trusting and more suspicious. It seems that I’m always looking for the catch, and it turns out that I’m not alone in this paranoid mindset. Some years ago, two very perspicacious researchers, Marian Friestad and Peter Wright, suggested that people in general are starting to understand that the offers companies put before us are in their best interest and not ours. As a consequence, we’ve become more distrustful—not only of those who are trying to swindle us but of everyone.

Free Money

After talking about our own experience of increasing disillusionment, Ayelet Gneezy (a professor at the University of California at San Diego), Stephen Spiller (a doctoral student at Duke University), and I decided to try to measure the extent of the public’s suspicion of companies. Our first question was how to measure the extent of distrust. We could, of course, ask each person in a group, “How suspicious do you feel on a scale from 1 to 10, 1 being not at all suspicious and 10 being very suspicious?” The problem with this type of measurement is that it’s difficult to tell exactly what 5.7 on such a scale really means. Would it suggest that people believed that the amazing offer from their cable company was real? Or would it mean that they were skeptical enough to read the fine print first? In addition, a lot of our research has shown that people often have wrong intuitions about their own behavior—they can say one thing but do another. So, we decided to measure a behavior that would tell us people’s degree of distrust, and our tool of choice was a free money experiment.

One lovely spring day, we set up a booth at a big commercial center in Cambridge, Massachusetts, manned by some undergraduate students. Above our booth was a large sign that read “Free Money.” On the front of the booth was a smaller sign that indicated how much money we would give people for free. Sometimes the sign said $1, sometimes $5, and other times $10, $20, or even $50. The busy people who worked at this commercial center passed a sign saying “Free Money, $20” (or whichever denomination it happened to be at the time) on their way to lunch or as they were leaving for the day. They also saw a pile of bills in the given denomination on the table. How many people do you think stopped and took us up on our offer?

We didn’t expect people to slow down and simply pick one of the bills off the table, taking us (or our sign) completely literally. We thought they would first ask if we were serious. On hearing us say, “Yes, we are, and you are welcome to take a bill,” we assumed they would take a bill and go on their way. And lo, every so often someone would walk by the booth slowly, reading the sign and glancing at the students, who really did not look like crooks. Here’s how the scenario generally went: Reassured, the man would look around and help himself to a bill. He would hold it up for a second, as if waiting for something to happen. Then, he would turn around and begin to walk slowly away. His pace would eventually pick up, and he would disappear around a corner.

When we offered $1, only 1 percent of those who passed our booth actually stopped to check it out. When we offered $5, a few more did, and so on up to $50. But even when we offered $50, only 19 percent of passersby stopped and took a bill. We were surprised and slightly disappointed with this low level of trust; 19 percent is not a high level of success, particularly when free money is (literally) on the table.

It is important to realize that in this setting, people did not necessarily have to believe that the money we offered was entirely free. They might have expected to have to do something in return—answer a short survey, for example. But even if they suspected as much, it might still be the case that the payment was a worthwhile return on an investment of answering a few questions. One possible explanation is that many passersby suspected a trick and did not think it worthwhile to ask. Their decisions alone cannot tell us how many were suspicious, busy, or simply uninterested. Occasionally, one of the students would approach someone who had clearly seen the offer on the booth but chosen to ignore it. When asked why they chose not to approach the booth, respondents said they believed that it was some kind of scheme. (A favorite claim made by economists is that there are no $100 bills lying on the sidewalk; if there were, the argument goes, someone would have already picked them up.)

To us, this looked like evidence of deep mistrust.

The Tragedy of the Commons

Trust, like money, is a crucial lubricant for the economy. When people trust other people, a merchant, or a company, they are more likely to buy, lend, and extend credit. In the old days, business was conducted on a gentleman’s handshake. But when the handshake results in a swindle, trust disappears and all subsequent transactions—whether between cheaters or the genuinely good-hearted—become more difficult.

A good analogy for social distrust can be found in the “tragedy of the commons.” This phrase can be traced back to Oxford professor William Forster Lloyd, who described the phenomenon in his 1833 book on population. He noted that in medieval England, parishes had common land on which each member of the community could graze a limited number of cattle and sheep. * Keeping the number of animals low allowed the grass to grow back at a speed that kept its level more or less the same. This approach was rather successful when all the farmers stuck to the rule. Unfortunately, in their selfish desire to improve their own financial situations, some of the farmers increased the number of their animals to a level that the land could not sustain. This strategy was very good (at least in the short run) for the individual farmers who had more animals, but each additional cow or sheep resulted in less grass for all of the animals. As the grass dwindled, all the livestock on the commons became malnourished and underproductive—a result that hurt everyone, including the greedy farmers.

Today, psychologists, economists and environmentalists use the phrase “the tragedy of the commons” to describe the same basic principle: when we use a common resource at a rate that is slower than the rate at which it replenishes, all is well. However, if a few individuals get greedy and use more than their share, the system of consumption becomes unsustainable, and in the long term, everybody loses. In essence, the tragedy of the commons is about two competing human interests. On one hand, an individual should care about the sustainability of shared resources in the long term because everyone, including the individual, benefits from it. At the same time, in the short term, the individual benefits immediately from taking more than his or her fair share. (Social scientists refer to such betrayers of social contracts as “defectors.”) Of course, if we all cared about the common good or thought about the long-term consequences of our actions, we might not run into resource-sharing problems. But because human beings tend to focus on short-term benefits and our own immediate needs, such tragedies of the commons occur frequently.

Take the wild salmon population, for example. While it is ideal for fishermen in general to limit their own catches so that the salmon population can be sustained, it’s more profitable for an individual fisherman to overfish in a given year. But if too many fishermen even slightly surpass the sustainable limit, the overall fish population becomes depleted. (For this reason, salmon fishermen are now constrained by law to a limited number every year). The energy pressures of the period in which I wrote this chapter offer another example of the tragedy of the commons. Although there is a finite amount of fossil fuel in the world, some countries, industries, businesses, and individuals use far more than others while making little effort to minimize their impact on the common pool. Even public resources such as clean air, land, trees, and water fall victim to this problem. In the absence of cooperation among all the players in protecting such resources, a small number of misbehaving entities can have a devastating effect on everyone.

If we start to think about trust as a public good (like clean air and water), we see that we can all benefit from higher levels of trust in terms of communicating with others, making financial transactions smoother, simplifying contracts, and many other business and social activities. Without constant suspicion, we can get more out of our exchanges with others while spending less time making sure that others will fulfill their promises to us. Yet as the tragedy of the commons exemplifies, in the short term it is beneficial for each individual to violate and take advantage of the established trust. I suspect that most people and companies miss or ignore the fact that trust is an important public resource and that losing it can have long-term negative consequences for everyone involved. It doesn’t take much to violate trust. Just a few bad players in the market can spoil it for everyone else.

Erosion of Trust over Time

In the picaresque film Little Big Man, the protagonist, a once-trusting but increasingly cynical young Jack Crabb (played by Dustin Hoffman), takes up with a one-eyed snake-oil salesman named Merriweather, who promises him that “if you stick with Merriweather, you’ll wear silk.” Crabb and Merriweather travel from town to town in the Old West, selling a miracle drug that Merriweather promises can make the blind see and cripples walk, but that is really just a brew concocted from rattlesnake heads. Of course, people get sick after swallowing it, and the townspeople take revenge by tarring and feathering the two tricksters. (In the real world of 1903, an analogous medicine called Rexall Americanitis Elixir was “especially recommended for nervous disorders, exhaustion, and all troubles arising from Americanitis.”)

Of course, old-fashioned trust abusers like Merriweather and the makers of Rexall Americanitis Elixir are but mild offenders relative to those of the modern age. Today, it’s easy for one individual to start selling “wonder pills” that promise to help you lose weight, keep or regrow your hair, enhance your sex life, and energize your workday. Unsuspecting people who buy such concoctions get all the benefits of placebos and, in the process, lose plenty of money. Meanwhile, the dishonest pill-purveyors gain substantially while further eroding the overall level of trust (at least for those who didn’t benefit from the placebo effect). This erosion not only makes it harder for the next wonder pill salesperson to peddle goods (which by itself is a good thing), but also makes it more difficult for us to believe those who truly deserve to be trusted.

There’s another aspect to this problem. Imagine that you are an honest person and you want to remain that way. How should you behave in a world where most people are untrustworthy and most individuals don’t trust others anyway? For a concrete example, suppose you’ve just joined an online dating site. If you suspect that most people on the site slightly exaggerate their vital and biographical statistics, you’re right! When Günter Hitsch and Ali Hortaçsu (both professors at the University of Chicago) and I looked into the world of online dating, we discovered that men cared mostly about women’s weight and women cared mostly about men’s height and income. We also discovered, perhaps not surprisingly, that the online women reported their weight to be substantially below average, while the men claimed to be taller and richer than average. We interpreted these patterns as evidence that people sometimes exaggerate traits they believe prospective partners value. A difference from population averages alone, however, does not establish that every profile is dishonest. A fellow who is 5'9" and earns $60,000 annually typically gives himself an extra inch and $30,000 raise, describing himself as being 5'10" and making $90,000. Meanwhile, his potential partner remembers her weight in college and, with a 5 percent discount, becomes 133 pounds.

But what happens if you’re a 5'9" man and you decide to be honest since you believe honesty is a critical component of a good relationship? You’re going to be penalized because women reading your 5'9" assume that your real height is 5'8" or 5'7". By refusing to cheat, you have substantially lowered your market value. So what do you do? You sigh, stuff your hands in your pockets, and realize that there’s a lot stacked against honesty. Given the importance of finding a partner and having come to believe that everyone cheats a little, you too, I suspect, would give in and decide to fudge the facts just a little bit. Of course, once we begin to cheat, even if only by a little, over time it can become a habit.

Consider, for example, the process of writing a résumé. I see many of my students’ résumés when they apply for jobs or graduate school and ask me for letters of recommendation. In their desire to stand out and grab the attention of the prospective employer, and because they think that everyone exaggerates a bit, they do too. Accordingly, anyone who’s ever taken intro to statistics is suddenly “fluent in statistical analysis,” a part-time job spent inputting data for an experiment turns into “assisting in data analysis,” and a two-month internship in Paris becomes “fluent in French.” In fact, the situation is so severe that when my research assistants show me their résumés, I sometimes feel as though the projects we have worked on together are actually theirs and that I’ve been assisting them.

How Deep Is Your Mistrust?

Following our “free money” experiment, Ayelet, Stephen, and I set up an experiment to see just how deep the level of mistrust of companies really goes. Specifically, we wanted to find out the degree to which people would doubt obviously truthful statements when these statements were associated with a brand. We started out by asking people whether they thought that completely unambiguous statements such as “the sun is yellow” and “a camel is bigger than a dog” were true or false, and 100 percent of the participants agreed they were true. Then we asked another group of people to evaluate the same statements, with the added information that they were made by either Procter & Gamble, the Democratic Party, or the Republican Party. Would giving these statements a corporate or political origin color our participants’ impressions and would they be more likely to suspect the truthfulness of these statements? The sad answer was yes. When we suggested that, say, the Democratic Party had issued the statement that “the sun is yellow,” our participants were more likely to question it. (“Sure it’s yellow, but it also has red spots on the surface and sometimes it looks white, so is it really just yellow?”) If the Republican Party or P&G issued the statement that “a camel is bigger than a dog,” the participants again were less certain and hedged their bets. (“What if the dog is a bull mastiff and the camel is a newborn . . . ?”) The source of the statement appeared to change how participants interpreted it: some began looking for exceptions to claims they had otherwise accepted.

In our next experiment, we wondered whether this kind of mistrust could change the actual experience someone was having with a product. To look into this question, we invited University of Chicago students to our lab to evaluate the quality of some stereo equipment, asking them to listen to an “Azur” model stereo made by Cambridge Audio. Before being set loose on the woofers and tweeters, all the participants read a brochure describing and reviewing all the different features of the stereo equipment. Some of the participants read a brochure said to be from Cambridge Audio, and others read the same exact brochure, but this one indicated that it came from Consumer Reports. Then, all of the participants took half an hour to listen to a composition by J. S. Bach and evaluate the stereo system. How powerful was the bass? How clear was the treble? Were the controls easy to use? Were there any sound distortions? And finally, how much would they pay for the system? As it turned out, the participants liked the stereo much more if they were told that the information they read came from an unbiased source such as Consumer Reports. They also said they would pay, on average, about $407 for the system, far more than the $282 offered by those who read the Cambridge Audio brochure. The brochure’s attributed source appeared to affect both reported enjoyment and willingness to pay, even though participants listened to the same equipment. We interpreted the difference as an effect of trust in the information source. (And this happens with relatively trusted brands. Just imagine what would happen with distrusted ones.)

Let’s return for a moment to my bad experience with the cable company’s bait-and-switch. Ayelet, Stephen, and I decided to run a little study of our own with the ad that promised me one month of free digital cable. We showed it to a few hundred people and asked them how much they thought this free offer would really cost. Being somewhat naïve and gullible myself, I was originally expecting the price to really be free (which, of course, it was not), but it turned out that very few people in our sample were as naïve as I had been; the vast majority expected the offer to cost them somewhere between $10 and $70. It seemed that most people have learned over time that there really is no such thing as a free lunch (or free cable service), and they adjust their expectations accordingly (although they are still annoyed when they find out the real price).

But this is not the end of the bad news. We also split our sample into two groups—one group that had prior experience with that particular cable provider and one that had not—and compared the two groups’ cost estimates for the advertised free service. It turned out that there was a large gap between the two groups: those who’d never done business with the “free cable” company were just as gullible as I was, while those who’d done business with the cable company estimated the real cost to be much higher. One explanation is that prior customers had learned to expect additional charges. The comparison is consistent with that explanation, though it does not by itself establish why the groups differed.

Is There Hope?

I realize all this sounds very pessimistic, but there is a brighter side. After all, human beings are inherently social and trusting animals, and we tend to believe in one another even in the face of clear rational reasons not to do so. Despite the difficulties of overcoming broken trust, I think that it is possible to repair it, given the right amount of investment and direction.

Consider the archetypal example of Johnson & Johnson’s handling of the 1982 Tylenol tampering incident. In September 1982, seven people in the Chicago area died after ingesting Extra Strength Tylenol capsules that a pharma-terrorist had adulterated with cyanide. From the beginning of the crisis, Johnson & Johnson’s managers set the safety of the consumer as their top priority and did everything in their power to contain the tragedy, regardless of where the fault lay. Johnson & Johnson quickly and voluntarily halted Tylenol production, withdrew all Tylenol capsule products from the market, urged the return of all previously purchased Tylenol capsule products, and readily provided replacement tablets. The company ultimately destroyed millions of bottles of Tylenol at a cost of more than $100 million. Tylenol’s market share, which had accounted for more than a third of U.S. painkiller sales, dropped dramatically, and many experts predicted the demise of the popular brand. However, after a brief period, Johnson & Johnson reintroduced Tylenol in a new tamper-resistant triple safety-sealed container, accompanied by a blitz of advertising and positive media attention. Tylenol’s market share recovered to 30 percent one year later, while Johnson & Johnson’s share price recovered within two months.

The fact that the Tylenol scare remains the overly cited paradigm of effective crisis management in business is almost depressing. After all, the example is an old one, and few companies since have behaved in such an exemplary manner. Nevertheless, it did set a powerful example of how transparency and sacrifice can serve to restore public trust and help a firm set itself on the right path.

Another promising way for companies to create trust is by addressing consumers’ complaints before they become formal disputes. At the time of writing, the cable giant (yes, cable giant) Comcast had begun doing this. Its director of digital care at the time, Frank Eliason, discovered that by searching the internet for the word Comcast (or sometimes Comcrap), he could locate unhappy customers who were venting to themselves and to their friends. He then took the next step and started corresponding with the complainers about their problems before they became formal complaints. (Other companies—including JetBlue, General Motors, Kodak, Dell, and Domino’s Pizza—were also tracking customers’ comments on Twitter and elsewhere.)

A more extreme version of this idea is for companies to make themselves transparent and vulnerable. By setting up Web sites where consumers can talk freely with the company and one another about products and services, warts and all, companies can expose themselves to large negative consequences if they ever misbehave. This type of transparency is a sort of commitment device that companies can use to force themselves to behave in a trustworthy way, even when they are tempted to do otherwise. And since in such a publicly exposed world it is harder to get away with flagrant misbehavior anyway, why not embrace more positive and trustworthy types of business processes?

Some special companies see trust as a public good (like clean air and water), and customers return the trust. One company in which I personally have a lot of faith is Timberland, the maker of outdoor clothing. I once attended a talk by Jeff Swartz, then its CEO, in which he detailed many of the ways that Timberland was trying to reduce CO2 emissions, recycle, use sustainable materials, and treat its employees fairly. At the end of Jeff’s talk, another CEO asked him, “What are the returns on these investments?” Jeff answered that he has been trying to find an economic return for these actions but that he had not yet found it in the data. He further added that it would be nice if being environmentally and socially responsible was also financially rewarding but that he didn’t really feel it was necessary. He simply wanted to make sure that his company followed the moral principles he wanted his kids to live by. After hearing this, I went and bought my first pair of Timberland shoes.

A Moral Tale

Aesop’s tale of “The Boy Who Cried Wolf” is a powerful fable of lost trust. You recall the story: A boy shepherd tending a town’s livestock one day decides to have a little fun. “Wolf! Wolf!” he cries, and immediately the townsmen come armed, ready to defend their precious animals. They find that they’ve been duped and return to the town. A few days later, the boy again cries, “Wolf! Wolf!” and again the townsmen come, armed, ready to defend the livestock. Again, there is no wolf. Finally, when a wolf really does come, the boy’s desperate cries for help fall on deaf ears. The townsmen no longer trust him and leave him to fend off the wolf on his own. Consequently, the livestock fall prey to the wolf (in some versions of the story, the wolf eats the boy as well).

Let’s think about this tale in terms of markets. There are two morals to the story. The first is that people are willing to forgive a bit of lying. Obviously, many corporations get away with lying in their advertisements and offers, at least temporarily. But when marketers persist in pulling bait-and-switch tactics, mistrust bites back, sinking its sharp teeth not only into the thigh of the perpetrator but also, more generally, into others as well. When market defectors spread false claims, more and more of us increase our level of distrust, and this distrust then gets diffused into everything we hear. We cast obvious truths into doubt, and we suspect everything. The cable company that betrayed my trust stung itself, for sure, but it also hurt its industry by causing consumers like me to mistrust telecommunications companies in general. And that mistrust, like a pebble dropped into a still pond, ripples throughout the telecommunications industry; creating tiny waves that can affect business and society as a whole.

But the second, more important moral—one that we are just beginning to understand—is that trust, once eroded, is very hard to restore. One only has to think about the banking crisis of 2008 that left the U.S. economy in tears. The multiple bailouts and new regulations that followed did little to heal the broken trust, and the behavior of Wall Street executives only ground salt into the wounds. I am unsure why trust as an important public resource was ignored, but it is clear to me that its loss will have long-term negative consequences for everyone involved, and that repairing the public trust will take a very long time. Thanks to shortsightedness and individual greed, the public commons (in this case, in the form of financial systems, government, and the economy as a whole) have suffered a great tragedy. Nevertheless, by coming to understand trust as an important, tangible public resource to be protected and cared for, organizations could do a great deal to restore it. A few are beginning to take great care to create and maintain trust, and do what they can to prevent it from deteriorating. In the end, I believe that companies that want to be successful will heed the example of Timberland and realize that honesty, transparency, conscientiousness, and fair dealing should be bedrock corporate principles. If we consumers reward their efforts by buying from them more frequently, we might over time be able to rebuild trust—at least in the select firms that really deserve it.