Some trust in financial institutions is needed, but not too much

It would seem that rebuilding confidence in the US Federal Reserve and the US Securities and Exchange Commission is economically more important than rebuilding trust in Citibank or AIG. Continuing disputes in Congress about the precise details of reform could, therefore, have an economic cost if a perception that the system will not be overhauled gains ground.

All these data are at an aggregate level and reflect average views among voters and investors. Yet we also know that individual views are remarkably heterogeneous. Some people are very trusting of others, and of the firms and institutions with which they do business. Others are congenitally distrustful.

Researchers at the European University Institute in Florence and University of California, Los Angeles recently demonstrated that there is a relationship between trust and individuals’ income. A pan-European opinion survey, which has been carried out for many years, allows us to relate the two. It asks simple but powerful questions about how far individuals are inclined to trust those with whom they deal.

The data show, intriguingly, that those who show levels of trust well below the average for the country they live in are likely to have lower incomes. Is that just because low-income people feel that life is unfair and therefore distrust those around them? It would seem not, as it is also true that very trusting people also have lower incomes than the average.

In other words, if you diverge markedly from society’s average level of trust, you are likely to lose out, either because you are so distrustful of others that you miss out on opportunities for investment and mutually beneficial exchange, or because you are so trusting that you leave yourself open to being cheated.

When anyone I don’t know says “trust me” — an irritating conversational tic — I usually close my wallet. Perhaps most academics, who are at the lower end of the skill and qualification-adjusted income scale, do the same. Maybe we should trust each other more — but not too much.

Howard Davies, former chairman of Britain’s Financial Services Authority and a former deputy governor of the Bank of England, is director of the London School of Economics.

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