Cultures of Trust
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Finance & Accounting Nov 2, 2011

Cul­tures of Trust

The way coun­tries view one anoth­er affects trade and investments.

Cultural biases in economic exchange stem from weak bilateral trust.

Yevgenia Nayberg

Based on the research of

Luigi Guiso

Paola Sapienza

Luigi Zingales

One day, around the time the Unit­ed States invad­ed Iraq, Pao­la Sapien­za was brows­ing a wine store near her home in Evanston, Illi­nois. She noticed some­thing odd: all of the French wines were on sale. When she asked the sales clerk why, he told her, These days, Amer­i­cans don’t like any­thing French.” France had loud­ly opposed mil­i­tary action in Iraq, and every­body was buzzing about it.

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The expe­ri­ence got Sapien­za, a pro­fes­sor of finance at the Kel­logg School of Man­age­ment, think­ing — just how much do cul­tur­al bias­es affect the way goods are traded?

As it turns out, quite a lot, accord­ing to a study of Euro­pean coun­tries that she pub­lished in The Quar­ter­ly Jour­nal of Eco­nom­ics with long­time col­lab­o­ra­tors Lui­gi Guiso, a pro­fes­sor at the Euro­pean Uni­ver­si­ty Insti­tute in Italy, and Lui­gi Zin­gales, a pro­fes­sor at the Uni­ver­si­ty of Chica­go. This trio of Ital­ians found that the extent to which peo­ple trust cit­i­zens of anoth­er coun­try plays a sur­pris­ing­ly large role in how much coun­tries trade with each oth­er and invest in one another.

Coun­tries in the Euro­pean Union (EU) that trust each oth­er for cul­tur­al rea­sons tend to trade and invest with each oth­er more than they do with oth­er EU part­ners, the study found. If cul­tur­al bias­es are skew­ing eco­nom­ic pat­terns even with­in the EU — where edu­ca­tion lev­els are high and where a com­mon mar­ket has been expand­ing for decades — they could be even more impor­tant in less pros­per­ous and more frac­tured parts of the world, the researchers say.

It makes intu­itive sense that trust is impor­tant in finan­cial trans­ac­tions. Take invest­ing in the stock mar­ket. In order to invest, you have to trust the bro­ker to exe­cute the order. It even­tu­al­ly goes in a firm, and you have to trust the man­ag­er. Each stage relies on me trust­ing that you’re going to do what you say,” Sapien­za points out.

Nev­er­the­less, this is one of the few eco­nom­ic stud­ies to dive into cul­tur­al trust. Most econ­o­mists believe that eco­nom­ics affects cul­ture, not the oth­er way around,” Sapien­za says. But our assump­tion is that cul­ture is quite persistent.”

Test­ing Bilat­er­al Trust

Part of the prob­lem in study­ing cul­tur­al trust is that it is a slip­pery con­cept and comes in many fla­vors. For this study, Sapien­za and col­leagues gleaned trust data from a sur­vey of thou­sands of peo­ple from 17 Euro­pean coun­tries, called Euro­barom­e­ter. This sur­vey peri­od­i­cal­ly asks respon­ders, among many oth­er ques­tions, how much trust they have in peo­ple from oth­er coun­tries: a lot, some, not very much, or none at all? After cod­ing these respons­es, Sapienza’s team cal­cu­lat­ed so-called bilat­er­al trust”: the extent to which peo­ple from one coun­try trust peo­ple from anoth­er par­tic­u­lar country.

The results indi­cate that the most trust­ed peo­ple are the Swedes and the least trust­ed the Ital­ians (Fig­ure 1). The Por­tuguese and Greeks trust the least, and the Swedes trust the most. But the most inter­est­ing aspect of the data is that peo­ple in dif­fer­ent coun­tries give dif­fer­ent answers regard­ing whom they trust. For instance, Ger­mans trust the British more than the French do. Also, even though Swedes are high­ly trust­ing, they tend to trust neigh­bor­ing coun­tries like Nor­way and Den­mark more than those far­ther away. British peo­ple trust the French even less than the Ital­ians, and the feel­ing is mutu­al: French peo­ple put Eng­land toward the bot­tom of the trust scale. When two sets of peo­ple gauge a country’s reli­a­bil­i­ty dif­fer­ent­ly, cul­tur­al pre­con­cep­tions may be at work.

Figure 1. Average level of trust citizens in one country (rows) have in citizens of another (columns). Range is from 1–4, where 1 = “No trust at all” and 4 = “A lot of trust”.

Pri­or bias­es are gen­er­al­ly root­ed in cul­ture. So we want­ed to fig­ure out, what are the spe­cif­ic cul­tur­al traits that dri­ve bilat­er­al trust?” Sapien­za says. One is reli­gion. When two coun­tries have 90 per­cent of their cit­i­zens shar­ing a reli­gion — such as Italy and Spain, which are pre­dom­i­nant­ly Catholic — they may trust each oth­er sig­nif­i­cant­ly more than do two coun­tries that prac­tice dif­fer­ent religions.

The researchers probed less obvi­ous cul­tur­al vari­ables as well. For exam­ple, they com­pared the trust rank­ings to mea­sures of genet­ic dis­tance” — how sim­i­lar a population’s genes are — and somat­ic dis­tance,” which is a mea­sure of phys­i­cal sim­i­lar­i­ties such as hair col­or, face shape, and height. For both genet­ic and somat­ic mea­sures, the more sim­i­lar the cit­i­zens of two coun­tries, the high­er their bilat­er­al trust.

Final­ly, the researchers con­sid­ered the his­to­ry of war between two coun­tries. When Sapien­za was grow­ing up in Italy, most of her his­to­ry class­es cen­tered on the Ital­ian uni­fi­ca­tion of the late 19th cen­tu­ry, a peri­od in which Italy fre­quent­ly faced off against Aus­tria. Ital­ian chil­dren tend to have a grudge against Aus­tria, Sapien­za says. It’s just a gut feel­ing you grow up with.” Sure enough, her data shows that coun­tries with a long his­to­ry of war — such as Eng­land and France, and Italy and Aus­tria — trust each oth­er less.

More Than Just Sore Feelings

These pat­terns are inter­est­ing in them­selves, but as Sapien­za real­ized in the wine shop, they can also bring real eco­nom­ic con­se­quences. Ana­lyz­ing the World Trade Data­base, a col­lec­tion of sta­tis­tics show­ing pat­terns of import­ing and export­ing between dif­fer­ent coun­tries over time, she found that the high­er the bilat­er­al trust, the more like­ly those coun­tries will trade with each oth­er. The effect is robust: one stan­dard devi­a­tion increase in trust increas­es exports to a coun­try by 10 per­cent­age points. What’s more, she found that bilat­er­al trust tilts port­fo­lio allo­ca­tion toward stocks of anoth­er country.

The find­ings are even more strik­ing con­sid­er­ing that, when com­pared with the rest of the world, Euro­pean coun­tries have fair­ly homoge­nous eth­nic pop­u­la­tions and sim­i­lar cul­tures. The researchers sus­pect that when coun­tries have more strik­ing dif­fer­ences, the effects of cul­ture on eco­nom­ics would be even more pronounced.

Intrigu­ing­ly, Sapien­za says that cul­tur­al fac­tors are not like­ly to have much of an impact on the trad­ing of com­modi­ties, such as oil or sug­ar. In these cas­es, basic sup­ply-and-demand con­sid­er­a­tions tend to dri­ve trade. The Unit­ed States, for instance, eager­ly buys oil from the Mid­dle East, despite enor­mous cul­tur­al and polit­i­cal hur­dles. But when qual­i­ty mat­ters, cul­tur­al fac­tors do, too: Amer­i­cans buy lots of Ger­man cars and French bot­tles of wine — unless, of course, the cul­tur­al tide turns.

Trans­lat­ing these find­ings into pol­i­cy dis­cus­sions is not easy. It’s very dif­fi­cult to change people’s bias­es, espe­cial­ly when it’s a col­lec­tive bias,” Sapien­za says. Still, I think it’s impor­tant for man­agers to know that a neg­a­tive image could have a big impact on the abil­i­ty to sell goods.”

Featured Faculty

Paola Sapienza

Donald C. Clark/HSBC Chair in Consumer Finance, Professor of Finance, and Zell Center Faculty Fellow

About the Writer

Virginia Hughes is a freelance science writer based in Brooklyn, New York.

About the Research

Guiso, Luigi, Paola Sapienza, and Luigi Zingales. 2009. “Cultural Biases in Economic Exchange.” The Quarterly Journal of Economics. 124(4): 1095-1131.

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