1. Trust and Social Capital in
the Information Age
Balázs Hámori
bhamori@uni-corvinus.hu
CONFERENCE
on
SOCIAL CAPITAL WITHIN THE VISEGRAD CONTEXT:
COOPERATION AND COMPETITION SEEN BY THE
FUTURE GENERATION OF BUSINESS PEOPLE

2. Socio-economic function of trust
“Trust is crucial wherever risk, uncertainty,
or interdependence exist.”
[McKnight & Chervany]

3. What is trust?
 Trust is a social expectation which means
that trust always refers to another
person or
a corporative actor.
I can trust my friends, my business
partners, my bank, but not my bike.

4. Trust and uncertainty
 The „trust-taker” is free in his response to
the one-sided advance concession of the
„trust-giver”.
 The trust placed in the trust-taker can be
either fulfilled or violated by him.
 This implies uncertainty for the trust-giver
with regard to the action of the trust-taker
which cannot be eliminated.
 On the other hand, this means that
compulsory relations contain no trust.

5. The Nature of Trust
 Trust can be spoken of only in situations in which
the „trust-taker” has an advantage from non-
cooperative action that violates the expectation of
„trust-giver”.
 Thus, as a buyer of a sports shoe, I trust that the shoe
recommended to me is indeed the most suitable shoe
for me to buy and not the one with the highest profit
margin for the seller.
 However, I do not trust when I assume in traffic that
other drivers will follow the rule of driving on the right
side of the road. No one would have an advantage by
deviating from this rule.
 Trust contains calculating considerations in the
sense that I trust only when I actually think the
„trust-taker” will act as he promises.

6. Social Capital
 There are many possible approaches to defining
social capital much to the exasperation of anyone
trying to research it. However there is some
consensus within the social sciences towards a
definition that emphasises the role of networks and
civic norms (Healy, 2001).
 Social capital is generally perceived to be a private
and public good (Putnam, 2000) because, through
its creation as a by-product of social relations, it
benefits both the creator and bystander.
 It is a classic public good because of its non-
exclusivity - its benefits cannot be restricted and
hence are available to all members of a community
indiscriminately (Woolcock, 2001).

7. The Elements of Social Capital
 Obligations and expectations which
depend on the trustworthiness of the
social environment,
 The capacity of information to flow
through the social structure in order to
provide a basis for action and
 The presence of norms accompanied by
effective sanctions.
(J.S. Coleman, 1990)

8. The Baker’s dilemma
 The baker would
bake bread if the
buyer paid first, while
the buyer would be
unwilling to pay
before receiving the
bread. This is a real
trap.
 There is no way out
without trust

9. Why is trust more important in
e-Society, e-Economy?
 The partners are unknown
(global players, infinite
number of players)
 There are less filtration for
newcomers (free entry, low
cost trading)
 The agreements are less
regulated than in
traditional markets
 the contracts are never
completely closed, and this
is more risky among
unknown partners

10. Simple model for accidental
transactions
 SELLER  BUYER
Cheats Controls
Honest Does’nt control
It is easy to check that applying pure strategies
doesn’t generate a Nash-equilibrium in the game.
So, both parties use mixed strategies, altering
the two basic approaches, but in this case
the payoff is sub-optimal

11. IN C2C and (partly) B2C
 Accidental transaction is more frequent
 Accidental transactions deteriorate the
efficiency of the market.

12. Two possible solutions for increasing
the payoffs
 Transformation of one-shoot transaction
for stable business relationship
 Trust-enhancing institutions, which make
positive effect on the players behavior
even in incidetntal transaction

13. Tit-for-tat strategy
 If the partner stands by the Pareto-
optimal solution (the seller is correct and
the buyer does not control him), so
his/her opponent also applies this
advantageous strategy.
 But if the partner deviates from it, the
other will behave adequately. (In each
given case only.)

14. Trigger strategy
 They choose a non-equilibrium pair of
strategies leading to Pareto-optimal outcome
(i.e. the seller is correct and the buyer does not
doubt this). In the case of this strategy the
seller’s payoff is not lower and the buyer’s one
is higher than it would be in Nash equilibrium.
(Y-F, or U).
 They employ this strategy in the first game and
continue to employ it until the other player
deviates from it. (But in that last case they can
never return to the strategy employed first.)

15. The personal relational networks
 „A group of 1,000 people typically has
connections to about 5 million others.
Information about how those relationships
interconnect is a powerful but often
overlooked corporate asset. It's a
valuable, organic, living thing. It exists,
but you can't tap into it.„
(Antony Brydon, CEO, Visible Path Corp.)

16. The mapping of personal relational
networks
 The mapping of personal relational networks
through the traffic generated by the employees
on intranets and the internet is spreading in an
ever widening circle. The inclusion of personal
relationships into the running of the firm is such
a strong objective that numerous software
(LexisNexis Interface, Contact Networks, etc.)
have been developed by now to efficiently map
and to exploit in a business sense the personal
relationships of the firm’s employees (right down
to the doorman).
 (All of this, of course, raises great concerns in regards
to personal data, but it would lead us far away from
the focus of our presentation.)

17. Trust- enhancing mechanisms
1.Technical security of the transactions
2. Legal institutions applying sanctions
3. Social mechanisms
4. Personal trust between partners

18. Trust enhancing mechanisms existing
in e-markets
 Mechanisms diminishing risks similar to
the ones applied in traditional markets
 But the weight and the forms of the
particular mechanisms differ significantly
from the traditional forms
 Some new trust enhancing mechanisms
also occure.

19. What makes a difference?
 Independent (not state-generated/owned)
trust-building institutions have more
opportunities to flourish in electronic
commerce than in traditional transactions.
 In contrast of traditional trust-enhancing
institutions, which were produced by
decades, sometimes by centuries, the
electronic versions ocure one day to
another

20. Institutionalization of buyers’
solidarity
 The fact, that buyers are no
longer isolated has
fundamentally changed the
nature of the market
transactions in electronic
markets
 Reputation-building and -
destroying institutions
 Not only buyers, but also
experts give an opinion of the
products which contributes to
diminishing the information
asymmetry

21. Intuit Inc. Case: the dynamism of
trust-destroying actions
 In the first days of 2003
the company enraged the
whole Web as its
TurboTax software had
given trouble to some
buyers.
 They immediately e-
mailed their complaints to
different Internet forums.
The speed of the spread
of the critical remarks
plunged the enterprise
into crisis

22. The end of buyers’ isolation and
passivity
 In Hungary we were also able to get a taste of
this in a special field, namely in health care,
which became involved in a scandal centered
around the website www.halapenz.hu.
 Patients share their information about the
„standard honorarium” (or gratitude payment)
forced to pay the doctors for the „free”
healthcare

23. Price setting of experience
goods distributed on the Web
Market of Knowledge- Knowledge-
tangible goods community market
P = h (V) R = i (V) P = f (R)
R = i (V)
Prices are fixed Reputation Price depends
on the basis of forms on the on the
the value of the basis of the reputation.
good (or on the value of the Reputation is
basis of the products based on the
costs) value of the
goods.

24. Further developments in trust-
building
 Transactional history of
each seller and buyer
 Due to this mechanism,
the individual actors’
reputations are clearly
shown.
 This system in itself
incites the participants to
cooperate and
contributes to the
improvement in the
quality of the goods.