Say you want to buy my house, but you're out of money. What can you do? There are some obvious things, like getting a job or taking out a loan, but those things bore you, so here's an interesting solution: you do something extraordinary that convinces me to trust you more than my wife. Then you sign a piece of paper saying: "I owe you one."
Assuming what you did to make me trust you was public enough, I might not even need to cash in your promise. Instead, I can go to someone else and hand them your note in exchange for a first edition of Newton's Principia. Now your promise has turned into currency. And I get to cry in silent awe.
Some of the most successful examples of people doing these types of transactions come from the early Islamic caliphate. Arabic papyri from the 9th century documents that merchants would write letters of credit (suftaja), saying, basically, "I owe you."
If the merchants had good reputations, these letters could be passed on from trader to trader – making their way from one end of the Sahara to the other. Even, on occasion, crossing the Indian Ocean. Traders in Zanzibar or Sri Lanka would trade pieces of paper backed by nothing but the reputation of a person living in Algiers, a person they would probably never meet. How could that possibly work?
David Graeber writes of one of these trading posts:
The level of trust [...] between merchants in the great Malay entrepôt Malacca, gateway to the spice islands of Indonesia, was legendary. The city had Swahili, Arab, Egyptian, Ethiopian, and Armenian quarters, as well as quarters for merchants from different regions of India, China, and Southeast Asia. Yet it was said that its merchants shunned enforceable contracts, preferring to seal transactions “with a handshake and a glance at heaven”.
How was it possible to scale trust so far?
In another essay, a few weeks ago, I proposed that people in the developed world rely too much on markets. We can save time and money if we invest a larger share of our resources in developing networks of trust, I argued.
Though I also noted that "I don't know how far you can scale that until you hit diminishing returns".
Well, it seems like the Islamic merchants have explored that question before me. And they took it pretty far.
How can you scale your network of trust in cost-effective ways? How can you find highly competent and trustworthy people willing to engage in win-win-transactions, without relying on institutions that limit defection?
My current best answer – which I will unpack in this essay – is this:
Form predictions about who is trustworthy, competent, and willing to engage in mutual aid.
Test those predictions by initiating small transactions.
Scale up transactions that beat the market by playing tit-for-almost-tat.
Expand through referrals.
1. Predictions
Whom should we trust?
We trust our friends. When we need someone to babysit our daughter, we call our mother. We ask our best friend for feedback on our essay. Our ex is a designer, she can do the logo. This is a good enough heuristic for everyday transactions.
But it doesn't scale.
As ChristianKl pointed out in the comments to the last essay, we have a bias toward thinking our friends more competent and trustworthy than they are. I, for one, do not optimize for trust in friendships; I optimize for wildness of conversation. And having an overcooked brain does not correlate with trustworthiness. It correlates with substance abuse and being on a first-name basis with the receptionists at the psychiatry ward.
Benjamin Franklin, famous for his ability to forge vast networks of trust (consisting of mentors, business partners, fraternities, voluntary associations…) was equally famous for his bad judgment in choosing friends. Hugh Meridith, a close friend turned business partner, took to drink as soon as the printing press was up. At one point, Franklin threw him off a boat when he refused his turn at the oars. No matter how long they kept him swimming behind the boat Meridith wouldn’t relent. Another close friend reneged on a large loan – 27 £! – and disappeared after Franklin brought him along on a business trip to London.
Being a great party invite is not the same thing as being a great business partner. Mixing those things up – I've tried – sets you up for Shakespearean betrayals.
Selueen recounts in the comments:
One of my relatives was technical director and de-facto co-owner of one local ISP. De jure he was nobody, he never got around to do all the paperwork - partly because he trusted his "friends", partly because there were some complicated issues, partly because he is rather lazy. Years and years of no consequences, until they decided to sell the company. Guess who's opinions was no considered and who got nothing out of the deal.
So an important thing to remember: a network of trust is not the same thing as your friends. It is a group of trusted connections. People you know can engage in mutually beneficial transactions.
You are looking for complementarity. An ideal connection is someone that can solve problems you can't – say a plumber, if you're a programmer – and someone for whom you, in turn, can provide value. (This leads trust networks to be more heterogeneous than typical friendships.)
But if you are a programmer, how do you know which plumber to trust? You don't.
But you have a trump card. You can make a Bayesian prediction.
To keep things simple, I’m going to pretend that trust can be reduced to two dimensions (whereas in reality, it's a mess of different factors). When you trust someone, you predict that (a) they will do a good job and (b) they will treat you well if you play fair. Let's call those two dimensions skill and willingness to give mutual aid.
Saying that you trust someone in that case means that you predict that they belong above this vertical line:
And we’re especially interested in the upper right corner. That’s what we’re trying to fill in when we scale our network of trust. How can we find people that are both skilled and helpful? How can we find more people that act as the hippies did in the last essay?
As I pointed out there, companies are trust networks – and looking at how they operate can help us scale. Compared to individuals, companies tend to be more deliberate about whom to trust. Successful companies spend large resources trying to predict how people will behave if they are included in the company trust network. Recruiters look at resumes, do tests, interviews, ask for referrals – in short, gather data points that help them model the future behavior of the person applying. Are they trustworthy? Will they give mutual aid to their colleagues? Are they skilled?
These predictions can then be compared to the actual outcome. And that feedback can be used to improve the recruiting heuristics to make future predictions more reliable.
When recruiting people to your personal network of trust, you might not be able to be as data-driven. But the underlying aim should be the same. Look for things that will help you predict how competent a person is, and how likely to defect.
Before asking a group of hippies to redo our roof, my wife talked to a neighbor that knows them to see if he would trust them. He would. Then we watched two documentaries about them to study the constructions they had designed, and see them in action. It looked OK to me, but more importantly – my wife was impressed. She has weird enough hobbies to be able to tell if a carpenter follows industry standards, or actually understands what he's doing.
All in all, this took us maybe 50 hours (including the books on carpentry and the history of construction that my wife reads while breastfeeding). It saved us something on the order of a year of salary.
If you want to try this at home, it worth pointing out that we live in the Danish countryside. That means the underlying incentive structure is pretty solid. And the incentive structure is what gives the trust diagram it's distribution. If you live in an environment where people only engage in one-off transactions, and bad actors aren’t punished, you have to deal with a gravitational force pulling everything toward the Prince of Nigeria.
2. Testing the predictions
Employing someone to redo your roof is a risky way to start a relationship.
If you have located a potentially trustworthy person, the safer way to test that prediction is to make a small transaction. Figure out some way you can help – lend them a motor saw if they need to release some anger on a tree; point out a missed opportunity in one of their essays – and then see if they look for ways to help you in return.
The cost of these experiments is capped, but the upside is unknown and may well be priceless. If you lend your neighbor a motor saw, you can't lose more than a motor saw. (In the US, I guess you could get sued as well if your neighbor had watched too much Evil Dead and decided to saw of their hand.) But the upside of motor saw loans can be enormous – high trust transactions for the rest of your life or your neighbors. Whichever is shortest.
In 1812, Michael Faraday, who at the time was an unschooled bookbinder, was looking for a way to become a scientist. It would have been tricky even today, him not having any formal education, but it was even more daunting in an age when only the landed gentry and some reverends had the luxury of doing science. What did he do? He made a gift. A book where he had bound his notes from Sir Humphry Davy’s lectures on chemistry. Davy was so touched – and impressed – that a year later, after having hurt his eyes experimenting with nitrogen trichloride, he asked Faraday to step in as his assistant.
If you find the idea of helping strangers repellent, you can also do it the other way around. Asking for what you want is a solid and under-used strategy.
After your kids have played together with your neighbor’s a few times, ask them if they can drive you to the hospital when your kid starts throwing up and fainting. That can be the start of something big. (The element of crisis might help cement the bond.)
When you get people to extend help, they sometimes continue to help just to live up to their self-identity of being someone that helps you. I'm not sure about the psychology here.
3. Scaling transaction sizes
So you got someone to drive your vomiting kid to the hospital? Good. The next step is to return the favor. But don't just return it, do it with suger on top.
The crucial thing about trust relationships is that you do not want them to even out. You never return an egg for an egg. You return a rhubarb pie.
Not tit-for-tat, but tit-for-almost-tat.
If someone buys you dinner and you wire them the exact amount, that is a signal that you don't want the relationship to continue. If you instead give back by inviting them to your midsummer celebrations – well, that's a whole other story.
When the person you are dealing with is trustworthy and competent, tit-for-almost-tat creates a ratchet. You return slightly bigger favors every time, taking turns scaling up the transactions.
I and my closest neighbor are locked into one such escalating arms race of helpfulness at the moment. Every day at dusk, I'm looking out across the field to see what he's up to. I'm trying to figure out if there is some way I can help him. We fenced in his orchard; he offered us to use his car when we go grocery shopping; my wife and daughter fed his horses when he was away; now, he's helping the hippies remove the old roof for us. It's a lovely little arms race, and it has saved both of us countless hours (compared to having to buy services in the market).
Of course, if we escalate too far we might reach a point where the expected value of future transactions is less than what we owe. At that point, the incentive structure shifts; my neighbor might decide to defect when he’s on top. The same thing can happen if he decides to move – at which point he’s no longer constrained by considerations about future transactions.
If he does, God forbid, I'm going to take a page from the Islamic merchant's playbook: I'll slander him in verse. And then I'll email it to all the connections we share.
4. Referrals
The best thing about having a trusted connection is that you can access that person’s network now.
Often the access is indirect. You don't need to know who your connection has to trust to be able to help you. I don't know the suppliers that the hippies rely on. The hippies are trust abstractions, a little bit like functions – since I trust their output, I don't need to see the implementation.
At other times, you want to refactor the function and get access to the connections directly. This is called asking for a referral. If I need plumbing, I ask the hippies whom they would use – and since I trust them, I can transfer that trust and gain a new trusted connection. I can also do chains of referrals, where I ask them to refer me to someone that refers me to someone else that refers me to… alas, the further you go, the more you dilute the trust so we can’t go on forever.
In an interview, anthropologist Joseph Henrich describes using these chains of referrals to establish trust with groups he wants to study:
Joseph Henrich: … making a chain of relationships. I did the same thing with the Mapuche in Chile. I had a friend who had a friend in Santiago, who had a woman who cleaned his house, who had a cousin in the southern part of the country. And I followed that chain of relationships into the community.
That gave him the trust needed to convince the Mapuche to participate in game-theoretical experiments. Making use of referrals this way, allowed him to expand his network of trust far beyond Dunbar's number – 150 – which is generally held to be the number of people you can coordinate through informal processes. It is one of the processes that makes it possible for a suftaja to travel across the Indian Ocean.
Referrals are a blast. The last time I traveled to a place where I didn't know anyone – Switzerland – I asked my friend Viktor to recommend me to people in Zürich and Bern. His connections in turn referred me to others. That immediately, as soon as I got off the train, planted me into a caring social network. Russian horror surf-bands. Ping pong in a stable. A Game of Thrones analysis marathon with some french literature students. They even bailed me out when I ran out of money, and got caught ticket-less on the train home.
To scale a network of trust you need to engage people you don't know in small transactions. You have to observe how they behave and see if the transactions are worth your time. When they are, you have to increase the transactions by returning ever-larger favors. And then you reach out through referrals.
Some people will be better at this than others.
Lyndon B. Johnson was an obsessive collector of trusted collaborators. From his college years on, he would do everything he could to make people he could trust stay in his orbit. He would place them in agencies he controlled, he would make them partners in law firms he trusted, or in his radio studio, or at subcontractors he favored. That way, when he decided to run for Senate, he had a minor army of lawyers and organizers that could be mobilized at short notice. And then, once elected, he proceeded to place them in federal agencies, where they would wait patiently for his bid on the presidency.
People like Johnson accumulate piles of trust and can make unfathomable numbers of referrals. They are massive trust abstractions. Having them in your network can vastly increase what you can accomplish.
But controlling the flow of trust also gives them power over you. They might take a cut of the transactions they enable, they might impose demands; Johnson perfected this. In the Senate, he would sit through the night with his phone in the dark, making call after call, pulling on an intricate web of connections until, by morning, the votes he needed had been switched. He would also humiliate the people that depended on him by making them take his orders while he shat in front of them.
When I discuss this essay with Ryan Fugger – a person who, having invented the concept behind Ripple, knows way more about trust than me – he points out that corporations usually play this trust abstraction role. Banks, for example, abstract trust, and then extract value from the transactions that enable. That's great. People who do not trust each other can buy trust from a corporation. But why are so many people unable to create their own trust?
Ryan writes in the chat:
… it's possible that most people just aren't interested in [tools that help them leverage their trust networks], and that the whole network would devolve into a network of banks that abstract the trust of their account holders, just like today.
For those willing to grow their networks of trust, rather than relying on bought trust, though, there is leverage to be had.
Take the Amish. In 1965, as Johnson (by then President) was expanding social security to include Medicare, the Amish leveraged their network power to renegotiate their deal with the State. Having high levels of trust, they were able to coordinate and get themselves exempted from the social security system – and the taxes.
Figuring out how you do that, however, I will have to leave for another day.