Betrayal Aversion: Evidence from Brazil, China, Oman, Switzerland, Turkey, and the United States

Risk aversion plays a central role in economic theory. It helps us understand why individuals insure and save, why investors do not place all their eggs in the basket offering the highest expected payoff, and why entrepreneurs earn a generous premium. But risk aversion alone may not account for people’s willingness to take risk when the chance event is the action of another person rather than nature, for then additional considerations may enter. We use the term “social risk” to describe situations where decisions by other human beings are the prime source of uncertainty. In this paper, we focus on the social risks involved when trusting another person, for example, a salesperson who may or may not describe a product accurately. In these trust situations, an individual (the principal) must decide whether to make herself vulnerable to another person (the agent). Traditional decision analysis, now well incorporated into economic theory, would tell us that for a rational, self-interested individual, “a risk is a risk is a risk.” Assuming that there was no effect on future behavior, a decision maker facing the same payoffs and probabilities would make the same decision whether nature or the choice of another person resolves a lottery. This paper examines whether individuals actually behave this way. Specifically, using a series of experiments, we compared individuals’ willingness to take risks when the outcome is due to a chance device, as opposed to an identical odds-and-payoffs situation where the outcome depends on whether another player proves trustworthy. We found that people are generally less willing to take a risk when the source of the risk is another person rather than nature. We argue that this is due to what we label “betrayal aversion.” Betrayal Aversion: Evidence from Brazil, China, Oman, Switzerland, Turkey, and the United States