Posted by: Martin | February 23, 2010

The Issue of Trust

A useful model to for dishonesty/trust in people can, I think, be made by dividing up people in three groups:

(1) Those who can act dishonestly regardless of risk/rewards, ie the Bernie Madoffs of this world.

(2) The majority who are capable of acting dishonestly if the risk/rewards are right.

(3) Those with very strong integrity that are honest even when the incentives stacked in favour of dishonesty.

Risk
The risk can be said the be the probability of getting caught multiplied by the consequences of getting caught. An example of a low risk situation would be to take home cheap office supplies like a paper or notepad from work. The risk would increase if the co-workers share an informal code of ethics saying that theft of office supplies is not ok, both by the probability of getting caught increasing, and by the informal punishment of being frowned upon which can be more severe than a formal punishment.  If management is perceived to be dishonest, and treating employees unfairly and badly, it is unlikely that a strong code of ethics among the employees will develop.

Put in the context of the Ivory Coast, there is a weak rule of law meaning that the risk of getting caught – at least for white collar crime – is reduced, and while formal punishment can be severe it is relatively arbitrary.  Trust throughout the society is lower, possibly due to a weak rule of low being in place for a long time and an unaccountable government (management) not perceived in a very good light by the population.  While I don’t think tolerance for violent crime or theft private persons’ property is higher in the Ivory Coast than elsewhere, tolerance for corruption and white collar crime appears to me to be greater than in more developed countries, thus reducing the severity of the informal punishment of such crimes.

Reward
The reward is the utility of the dishonest act for the person that commits it. It is linked to wealth, or rather to the relation between the utility of a person’s wealth to the utility of the dishonest act.  The rewards for the same dishonest act are much greater for a poor person than for a rich person.

In conclusion, the people of group (2) in the Ivory Coast have a different risk/reward ratio compared to developed countries – much more tilted towards dishonesty causing doing business there more challenging. I guess the family business model has an advantage in this type of environment – the family trust replaces the weak trust in society.

In a developed country with a functioning legal system, the greatest concern for a business is to avoid group (1).  In a country like the Ivory Coast, focusing on setting the risk/reward ratio right within the company becomes more important, and the distinction between group (2) and (3) becomes relevant.  Having a company entirely made up of group (3) staff would be a really big competitive advantage. The question is just how to find such people. I can spot them after spending a lot of time with them, but it seems very difficult to spot them over a job interview.

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Responses

  1. Join Rotary International, and only work with Rotarians, might sound facetious, but it does have some sense.

    I don’t know who you are, age nor background, and whilst your written English sound cultivated and well educated, I get a feeeling that you have an underlying (and maybe slightly immature, therefore young) cynicism, and you wouldn’t support/tolerate Rotary because it is perceived to be “establishment”.

    It used to be said by the older ex-patriates that “you will only make a lot of money in Africa once you have lost a lot of money in Africa !””

  2. The last paragraph probably has a lot of truth in it. And that’s why the risk premiums and the returns are so high, and why it is so important with due diligence, to be wary of scams/frauds and to have a network of experienced and trustworthy people around you. Rotary sounds like a good idea by the way, I have nothing against them!

    There is a saying “Learn from other people’s mistakes, you don’t have time to make all of them yourself”. I would really like to hear stories from foreigners doing business in the Ivory Coast actually – what are the pitfalls they have found?

  3. […] anywhere, some people, given the wrong incentives are likely to be dishonest, and as previously discussed the incentives look different in a country such as the Ivory Coast. Possibly related posts: […]

  4. […] a too low tax amount in return for a kickback. As my friend has strong integrity (group 3 in the The Issue of Trust post) he attempted to charge the correct higher tax amount without asking for a kickback, and this […]

  5. […] Business is in many aspects based on trust. To trust or not to trust As discussed in the Issue of Trust post, the incentives for dishonesty are much stronger in a developing country like the Ivory Coast, […]

  6. […] people who believe in your dream and have rock solid integrity. (See the discussion in the the Issue of trust post) “Try to prove there are people actually interested in your product before you spend money […]

  7. […] I actually tried to tackle the issue of  how this problem can be so prevalent  in one of my first posts called The Issue of Trust. […]


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