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Trust and Financial Trades: Lessons from an Investment Game Where Reciprocators Can Hide Behind Probabilities

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Abstract

In this paper we show that if a very small, exogenously given probability of terminating the exchange is introduced in an elementary investment game, reciprocators play more often the defection strategy. Everything happens as if they "hide behind probabilities" in order to break the trust relationship. Investors do no not seem able to internalize the reciprocators' change in behavior. This could explain why trades involving an exogenous risk of value destruction, such as financial transactions, provide an unfavorable environment for trust-building

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  • Vranceanu, Radu & Sutan, Angela & Dubart, Delphine, 2010. "Trust and Financial Trades: Lessons from an Investment Game Where Reciprocators Can Hide Behind Probabilities," ESSEC Working Papers DR 10007, ESSEC Research Center, ESSEC Business School.
    • Handle: RePEc:ebg:essewp:dr-10007
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    1. Charness, Gary & Dufwenberg, Martin, 2003. "Promises & Partnership," Research Papers in Economics 2003:3, Stockholm University, Department of Economics.
    2. Vranceanu, Radu & Laot, Maxime & Dubart, Delphine, 2010. "Une échelle de mesure de la connaissance en raisonnement économique et résultats d'une enquête menée en décembre 2009," ESSEC Working Papers DR 10001, ESSEC Research Center, ESSEC Business School.
    3. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2008. "Trusting the Stock Market," Journal of Finance, American Finance Association, vol. 63(6), pages 2557-2600, December.
    4. Patricia Crifo & Nicolas Mottis, 2010. "SRI analysis and asset management : independent or convergent ? : A field study on the French market," Post-Print hal-00572379, HAL.
    5. Batista, Catia & Potin, Jacques, 2008. "International Specialization and the Return to Capital, 1976-2000," ESSEC Working Papers DR 08001, ESSEC Research Center, ESSEC Business School.
    6. Gary Charness & Martin Dufwenberg, 2006. "Promises and Partnership," Econometrica, Econometric Society, vol. 74(6), pages 1579-1601, November.
    7. Jason Dana & Roberto Weber & Jason Kuang, 2007. "Exploiting moral wiggle room: experiments demonstrating an illusory preference for fairness," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 33(1), pages 67-80, October.
    8. Batista, Catia & Potin, Jacques, 2006. "Stages of Diversification and Capital Accumulation in an Heckscher-Ohlin World, 1975-1995," ESSEC Working Papers DR 06008, ESSEC Research Center, ESSEC Business School.
    9. Berg Joyce & Dickhaut John & McCabe Kevin, 1995. "Trust, Reciprocity, and Social History," Games and Economic Behavior, Elsevier, vol. 10(1), pages 122-142, July.
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    Cited by:

    1. Christophe Heintz & Jérémy Celse & Francesca Giardini & Sylvain Max, 2015. "Facing expectations: Those that we prefer to fulfil and those that we disregard," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 10(5), pages 442-455, September.
    2. Besancenot, Damien & Vranceanu, Radu, 2011. "Banks' risk race: A signaling explanation," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 784-791, October.
    3. Sutan, Angela & Vranceanu, Radu, 2016. "Lying about delegation," Journal of Economic Behavior & Organization, Elsevier, vol. 121(C), pages 29-40.
    4. Fooken, Jonas, 2023. "Trusting when risk and ambiguity create opportunities for exploitation," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 103(C).
    5. Khalmetski, Kiryl & Rockenbach, Bettina & Werner, Peter, 2017. "Evasive lying in strategic communication," Journal of Public Economics, Elsevier, vol. 156(C), pages 59-72.
    6. repec:cup:judgdm:v:10:y:2015:i:5:p:442-455 is not listed on IDEAS
    7. Tagat, Anirudh & Kapoor, Hansika, 2017. "The trust broker game: A three-player trust game with probabilistic returns and information asymmetry," Economics Discussion Papers 2017-33, Kiel Institute for the World Economy (IfW Kiel).

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    More about this item

    Keywords

    Experimental Economics; Financial Transactions; Investment Game; Objective Risk; Trust;
    All these keywords.

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G00 - Financial Economics - - General - - - General

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