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A possible explanation for the substantial amount of “irrational” behavior observed in markets (and elsewhere) is that humans are a highly social species and to an extent value what other humans think of them. This behavior can be termed trustworthiness— cooperating when someone places trust in us. Indeed, we inculcate children nearly from birth to share and care about others. In economic nomenclature, reciprocating what others expect us to do may provide a utility flow itself (Frey ****). Loosely, it is possible that it “feels good” to fulfill others’ expectations in us. If such a cooperative instinct exists, it must be conditioned on the particular environment of exchange, including the history of interactions (if any) with a potential exchange partner. If conditional cooperation where not the case, individuals would be gullible, and the genes that code for gullibility would not have survived over evolutionary time (Boyd et al. 2003).
Instead, conditional on the parties involved in trade, budget and time constraints, and the social, economic, and legal institutions in place, individuals may exhibit high degrees of cooperation or nearly complete selfishness. This leads one to ask which institutional arrangements promote or inhibit trustworthiness. A second question is, for a fixed institutional environment, what are the mechanisms that allow us to decide who to trust, and when to be trustworthy? Relatedly, for a given institutional setting, why is there variation among individuals if the incentives to trust or be trustworthy are identical?
This chapter sketches a neuroeconomic model of trust and provides several forms of evidence in support of this model. Neuroeconomics (Zak, 2004) is an emerging transdisciplinary field that utilizes the measurement techniques of neuroscience to understand how people make economic decisions. This approach is of particular interest in studying trust because subjects in a laboratory who can choose to trust others and be trustworthy are unable to articulate why they make their decisions. Taking neurophysiological measurements during trust experiments permits researchers to directly identify how subjects make decisions even when the subjects themselves are unaware of how they do this. Readers are referred to Zak (2004) for a full description of neuroscientific techniques used to measure brain activity. These tools open the black box inside the skull and provide radical new insights in economics. Trust is among the most interesting of the topics being studied.