behavioral economics

Trust a behavior & measure of commerce & GDP

Trust is the inventory, the stock turn is how many times trust converts into social or economic transactions and the Cash Conversion Cycle is measured in days for that trust to convert.

I was recently in Finland and a CEO traveling with us from Bangalore asked, “are we really living in a home that people normally live in and why did they rent this to us as strangers and why does this not happen in South Asia?” My simple answer was “Trust” and that’s why Airbnb is spreading globally in the most high trust cultures and disrupting the hospitality industry.  That is why ask any business school alum and you will hear constant talk about what a brand stands for, trust. That very measure is now being disrupted and commoditized via technology.

Whether a feature in a product or a service, trust is the single behavior is disputing traditional business models and industries.  Let’s look at a few random examples.

Nordic or European or North America are high trust cultures and thus this is critical to their innovation and growth, while countries with low trust cultures see high friction on the street and it does not take any great imagination to measure that trust.The high friction from lack of listing to the way companies interview and hire people to the way people drive on the road. Or why farmers globally don’t have direct access to markets and why intermediaries want to control market access. Or why people around the world are loosing faith in mainstream banking and financial services.

Why is Trust critical? Because you can measure it with a direct impact on velocity of commerce and its impact on any economy. Look at where the greatest usage of Airbnb as an example and that would be a direct indicator of trust.

“The Barclay’s report, titled “Hotels: Is Airbnb a game-changer?,” predicts that Airbnb’s growth in bookings could triple in size in the next year, putting the company on track to outpace the largest hotel companies within a few years. It projects that by the end of 2016, the room-sharing platform could boast 129 million room-nights per year. Airbnb currently represents as much as 17.2% of hotel room supply in New York, 11.9% in Paris, and 10.4% in London, according to Barclays’ estimates, and those percentages are projected to increase.”

Screen Shot 2015-12-23 at 9.32.40 PM.png

Airbnb will soon be booking more rooms than the world’s largest hotel chains

If one looks at the most competitive and non-competitive countries in the world, you see that “Trust” is the oil that reduces friction and accelerates a society and economy. That does not surprise you that the most competitive countries run on trust and the among the lowers like in South Asia are poor on trust.

The WEF Global Competitiveness Report is a direct measure of what the  reality is.

Competitiveness Rankings

Look at how powerful trust as an indicator can serve to discover new market opportunities, enable design of products and services or create new technologies and business models. Where is FB or WhatsApp used the most? Where is any free or open source software used the most? Why do people in South Asia always invest in Gold, real estate or save in fixed deposits and transact in cash the most?  This is how powerful trust is an indicator. It can and shapes the very foundation of design of any business, innovation, product or service.

A Forbes 2010 article in the Forbes magazine by Tim Harford titled “The Economics Of Trust” had  a brilliant summary.

If you take a broad enough definition of trust, then it would explain basically all the difference between the per capita income of the United States and Somalia,” ventures Steve Knack, a senior economist at the World Bank who has been studying the economics of trust for over a decade. That suggests that trust is worth $12.4 trillion dollars a year to the U.S., which, in case you are wondering, is 99.5% of this country’s income (2006 figures). If you make $40,000 a year, then $200 is down to hard work and $39,800 is down to trust.

http://www.forbes.com/2006/09/22/trust-economy-markets-tech_cx_th_06trust_0925harford.html

The World Values Survey is a good tool to look at some indicators which are a great start.

Screen Shot 2015-12-23 at 9.53.54 PM.png

http://www.jdsurvey.net/jds/jdsurveyMaps.jsp?Idioma=I&SeccionTexto=0404&NOID=104

For that matter who will win the next US presidential election or whether new companies operating in ecommerce in India and China will drive value or driverless cars become mainstream? The answers lie in the trust reflected via business models.

So technologies from blockchains to marketplaces such as Airbnb or Uber or new platforms that are connecting the low trust and in the model to algorithmize trust. How big is this market where trust is the currency and index of the market size. Well we have 7Billion people on the planet. So your imagination is all that is needed. Have a great week and Merry X’mas!

Some good reading.

http://www.oecd.org/forum/the-cost-of-mistrust.htm

https://hbr.org/2009/07/the-end-of-rational-economics

http://www.aei.org/wp-content/uploads/2013/09/-five-years-after-the-crash-what-americans-think-about-wall-street-banks-business-and-free-enterprise_083339502447.pdf

The Blockchain and the Rise of Networked Trust

http://www3.weforum.org/docs/WEF_EvolutionTrustBusinessDeliveryValues_report_2015.pdf

THE CURRENCY OF TRUST: WHAT BUSINESS LEADERS CAN LEARN FROM THE EXTREME POOR

http://jenni.uchicago.edu/Spencer_Conference/Representative%20Papers/Fehr_On%20the%20Economics%20and%20Biology%20of%20Trust%20(Final%20Submission)-1.pdf

http://www.fastcompany.com/3003277/trust-currency

http://scholar.harvard.edu/files/laibson/files/measuring_trust.pdf

https://hbr.org/2015/06/transparency-trust-and-bitcoin

http://www.acton.org/pub/religion-liberty/volume-16-number-3/economy-trust

http://www.palgrave.com/page/detail/John-Maynard-Keynes-and-the-Economy-of-Trust/?sf1=barcode&st1=9781137467225

http://www.forbes.com/sites/rajeevpeshawaria/2013/09/22/trust-the-currency-of-leadership/

 

http://jenni.uchicago.edu/Spencer_Conference/Representative%20Papers/Fehr_On%20the%20Economics%20and%20Biology%20of%20Trust%20(Final%20Submission)-1.pdf

 

 

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