Trust But Don’t Verify
Aimone and Houser find we are willing to pay to avoid knowing that we have been betrayed:
Here we report data from one-shot two-person binary investment games in which investors can choose not to know the decision of their particular trustee, and instead receive payment according to a random draw from a separate pool of decisions identical to the pool of trustees’ decisions. Note that the probability of receiving the "cooperative" outcome is identical in the two cases, and participants understand this is the case. … Our main finding is that investors systematically prefer to remain ignorant of their specific trustee’s decision. Moreover, when avoiding this information is not possible investors are substantially less likely to make trusting decisions. These results are convergent evidence that outcome-based models cannot fully explain economic decision making in strategic environments.
Added 25 Oct: Can this help explain why we rely so little on incentive contracts for docs, real estate agents, etc.?
I think saying that people are "willing to pay to not know" is a little misleading. I read through most of the report, and maybe I missed the bit where they are offered the chance to not know for a fee, but it seems the conclusion drawn was "if given the option, people would rather not know, and if they are forced to know are less likely to invest than if given the option or if forced to not know". Given investing was on average good for the investor this a form of paying - but not in the sense the investor would feel like they are paying.
Whether or not I've misinterpreted this though, a very interesting result.
Robin, these links to thought provoking articles -whether I agree the with conclusions it or not- I and many others come to this blog for.
If you stop blogging, to do something more ambitious, please check in from time to time to engage, enrage, and annoy the lower lifes.