Thought of the Week – The trust equation
By coincidence, I had several chats in recent weeks with clients, colleagues and friends about the trust equation. Originally invented by Charles Green and his co-authors of The Trusted Advisor, it provides a neat framework to think about trust, how to gain it and how to preserve it. Personally, I wrote about it for the first time when I became disillusioned with the abysmal behaviour of banks during the financial crisis. Since then, the trust equation has been a constant companion of mine to assess who to trust and how to gain and increase the trust my clients placed in me.
Originally, the trust equation was developed for financial advisors and relationship managers, but I have adapted it slightly to better fit my purpose. My version of the trust equation looks like this:
T=(C ×R ×I)/SI
where T = Trust, C = Competence, R = Reliability, I = Intimacy, and SI = Self-Interest.
What this equation says is that trust increases if any of competence, reliability, and intimacy increases and declines if self-interest increases.
To give you an example. If you want to gain other people’s trust, you have to be competent at what you do. The more competent you are, e.g., in your job, the more people will trust you with their problems.
Similarly, being reliable (i.e. following through on promises, being on time, and meeting deadlines) increases trust.
And of course, the more intimate your relationship with another person is, the more you trust them and the more they trust you. This is not about sex, but about how well you know each other. It reflects the fact that we trust friends and family more than work colleagues, and we trust work colleagues more than strangers.
Finally, there is the element of self-interest. In business transactions, self-interest is always a part of the equation, but the more self-interested a person or company acts, the less other people or customers will trust it and the less business it will do.
Look at any struggling company and you will quickly be able to assess why the company is failing and what it can do about it:
- Boeing’s issues: A lack of reliability combined with excessive self-interest in dealing with the original 737 Max issues in 2019 when it tried to shirk its responsibilities to the victims of the disasters.
- NASA’s Challenger catastrophe: A lack of intimacy among different levels of management and experts in the organisation led to engineers underreporting risks to their managers, who underreported risks to their managers, etc.
- Meta claiming it cannot police the posts on platforms like Facebook or Instagram and cannot improve its algorithms to reduce harm to users: Blatant self-interest.
This is why I like voluntary turnover as a key measure of a company’s culture. If employees lose trust in their employer, they move on to another employer they trust more.
Trust is the fundamental glue that holds our society together. It’s not just about business relationships. Think about the modern financial system based on the trust placed in central banks that they will honour the promises they make by issuing people a piece of paper that says $1 on it. Or the trust placed in governments that issue debt they promise to pay back at a later time. If a country no longer honours these promises, trust evaporates quickly, and the consequences are grave. Just ask Argentinians.
This is why a study about banks I came across didn’t surprise me at all. They looked at the level of general trust in different countries as evaluated in the World Values Survey and found that banks in countries with higher levels of trust in society have lower market and idiosyncratic risks. This is particularly pronounced in countries with weak institutions and governance rules.
What seems to happen is that in societies with higher levels of trust, banks are trusted more by customers. And people working at these banks trust each other more. All that increases the flow of information and the control of processes and individual behaviour. In essence, a tighter social fabric is partly a replacement for internal audits and risk controls. Because if people trust each other more, they work better together and are less likely to violate the trust placed in them.
So, there you have it. If you want to be more successful in your job and life, you can do worse than think about the trust equation, how it applies to you and what you can do to improve C, R, and I while reducing SI.
Thought of the Day features investment-related and economics-related musings that don’t necessarily have anything to do with current markets. They are designed to take a step back and think about the world a little bit differently. Feel free to share these thoughts with your colleagues whenever you find them interesting. If you have colleagues who would like to receive this publication please ask them to send an email to joachim.klement@liberum.com. This publication is free for everyone
