The Trust Manifesto

“Well, I think if you say you’re going to do something and don’t do it, that’s trustworthiness.”
— George W. Bush

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I went to the International Center of Photography last month.
They have a gift shop there which is almost all photography books, not
gold plated Leica cameras. They have a sign posted saying that you need
to check your backpacks before entering the gift shop. At first
I thought they meant someone had to look in the backpack to see what was
in it, on the way in or out, but it meant that you had to drop the backpack
off with a guard and get a claim check. That was across the lobby and
pretty inconvenient, and the guards looked less trustworthy than me.
I didn’t want to leave my iPod Nano with those creeps!

But think of what this does to sales at the ICP gift shop. Most of the
people in the ICP are probably not hooligans; the museum was barely
interesting enough for me, who is obsessed with photography. It costs
$10 just to get into the place. Let’s say that 50% of the potential
visitors to the giftshop are turned away by the backpack policy. Let’s
say that each one of them would have spent $10.00 on the average,
and that the markup on books is 100%, so that each visitor would
have averaged $5.00 in profit. (In other words, if a $40 book gets
stolen, the store can replace it on the shelf for just $20.)

Let’s imagine that all theft in the store involved backpacks, and
that the thieves would steal $100 worth of books on average (which
again could be replaced on the shelf for $50).

So, if 1000 people came to the museum in a day, 500 would be
dissuaded from visiting the gift shop at the end, meaning a loss
of $2500 in profit. On the bright side, a certain number of book
thieves would be thwarted by this no-backpack policy (and would
presumably devote themselves to other easier crimes in the
Big Apple, such as stealing jewels in the Diamond District, which
is just three blocks away). If each book thief took $50 in net
value, it means that 50 of them per day would have to be warded
off just to break even. That’s 5% of all the visitors to the museum.

This is a perfect example of Prospect Theory… creating a policy that
ensures against possible loss, even if it means sacrificing even more
in expected profits.

What a dumb policy.

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I realize that I haven’t posted in a long time, but I’ve been thinking and
reading about Trust while traveling and staying busy with work. In the
latest issue of Smart Money, there is an article which talks about Prospect Theory,
which has huge relevance to the Trust Manifesto.

In the article, they talk about a Cognitive Reflection Test (CRT), which
consists of just three questions:

1) A bat and a ball cost $1.10 in total. The bat costs $1 more than
the ball. How much does the ball cost?

2) If it takes five machines five minutes to make five widgets, how
long would it take 100 machines to make 100 widgets?

3) In a lake, there is a patch of lily pads. Every day, the patch
doubles in size. If it takes 48 days for the patch to cover the entire lake,
how long would it take for the patch to cover half of the lake?

It then says “each question has an intuitive – and wrong – response”.

I am proud that I got them all correct… “even at MIT, most students
got at least one answer wrong” it says. But it could just be that I have
seen many puzzles over the years and memorized the answers.

It says this test has an amazing correlation with being able to evaluate
risky propositions and the time value of money, the first of which is
the main theme of the Trust Manifesto.

Then they talk about Prospect Theory, which in summary says that
people take greater risks to avoid losses than they do to earn profits,
because losing feels worse than winning feels good. In the Wikipedia
article, you can see an actual graph, which in a perfectly logical person
would have the same shape in the loss area as in the winning area.

An example experiment is where people are asked whether they
prefer a sure $500, or a 15% chance of winning $1,000,000. People
who understand expected values well (and score highly on the CRT)
will certainly jump on the latter, and people who scored zero on the
CRT almost always choose the certain $500.

Another experiment is offering a sure $100, or a 75% chance of
winning $200. Only 19% of people with a zero on the CRT took
the gamble, even though it is a higher expected value. When the
values are negated, such that it is a sure $100 loss, or a 75%
chance of losing $200, the people with a zero on the CRT, most
gambled on the $200 loss, in effect taking a $150 expected loss
for the chance of breaking even, rather than an expected loss
of $100. People with high CRT scores had the reverse pattern.

Prospect Theory is only about 25 years old, but perfectly explains some
of the mechanisms that the Trust Manifesto is attempting to explain.

Put another way, a rational person would be willing to spend the same
amount of money and energy to enable a 50% chance of a $100 gain
as they would to prevent a 50% chance of a $100 loss. In practice, many
people are more energetic about preventing the loss, even though the
events have the same absolute expected value.

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