Trust Me?

If you were a banker, would you advance cash—more than forty million dollars in all—to people if you had no way of knowing how much money they had in their accounts or even whether they were one of your customers?

That’s what Hancock Bank did in 2005 after Hurricane Katrina all but demolished their 17-story corporate headquarters in Gulfport, Mississippi.

The 28-foot storm surge flooded the ground floor. Thirteen hundred windowpanes were shattered, exposing the interior to wind-driven wind and salt spray. The one-inch thick steel roof was peeled back, and then blown away. Their central data base, exposed to the elements, was destroyed.

Power was out and communication systems were down throughout the whole Gulf region, of course. ATMs were useless. Yet people needed cash now to purchase food, medicine, and clean-up supplies from stores that were struggling to reopen.

Rather than wait weeks to restore normal operations, Hancock officials quickly reopened its branches even though they lacked lights and phones, and in some cases, roofs on the buildings. They allowed people (whether or not they were Hancock customers) to withdraw up to $200 simply by providing their name, address, and social security numbers on a scrap of paper. Even people who had lost their IDs got money.

Bank officials had studied their charter. The stated mission was to serve people and the community. There was no mention of profit, though as the long time chair of the bank, Leo Seal, often reminded them, the concept of banking would be impossible unless 99 percent of people were honest. Hancock was counting on having the IOUs paid back.

I came across this story two days ago, as I finished a terrific new book, The Truth about Trust, by Northeastern University Professor David DeSteno. I don't know the author, but judging from his research, he’s no Pollyanna when it comes to expecting people to keep promises.

DeSteno and his co-authors asked people in one study if it would be wrong to misreport the results of a coin flip, if heads would give them a reward while getting tails would mean a penalty. Each and every subject declared that misrepresentation would be wrong. Yet when these same people were taken to a private room to toss the coin, a hidden camera revealed that 90 percent of them did not do the flip. (Actually some of those people did flip, though they continued to do so until heads came up.) Ouch!

Other studies about trust and promise-keeping, including some by DeSteno, add more bad news. For example, people in greater positions of power seem more likely to break their word. And students who take economics courses are more likely to excuse greed, even when it’s at other people’s expense.

So what are we to do, when others say, “Trust me”?

My HBS colleague, Deepak Malhotra, has done ground-breaking research on this question. He advises resisting the impulse to write detailed contracts to spell out all the rights and responsibilities of the parties. Micro-attention on substance can squash relational obligations; and the more language there is in a contract, the more items people have to bicker over. A thoughtfully composed letter of understanding may yield more durable agreement than countless pages of boilerplate.

Deepak has also studied how trust looks different, if you’re the person deciding whether to rely on another’s promise or, instead, you’re the one who later must decide whether to keep your word. The person doing the trusting focuses on the risk of betrayal. By contrast, the one being trusted weighs whether the benefit they're getting is large or small.

It turns out that when there's reciprocity, it's driven more by feeling indebted for what they received, rather than on appreciating that the other person went out on limb for them. Deepak notes that in long-term relationships, people stop calculating those risks and benefits and instead “adopt a more informal norm of providing what the other needs, when it is needed.”

That brings us back to the Hancock Bank story. Of the $43,000,000 that was advanced, all but $200,000 was paid back. (That’s 99.5 percent, topping even Mr. Seal’s already high threshold for honesty.) Why is that subjects in psych labs often play fast and loose with the rules in psych labs, while almost everybody in this real world case did the right thing?

It’s likely that reciprocity and a profound sense of relationship were both at work. The fact that the bank extended itself, not simply by providing much-needed cash, but by doing it swiftly and under adverse circumstances, made those scribbled IOUs almost as good as gold. And, as it turned out, the bank did well by doing good. Very well, in fact. In the five months following the Katrina disaster, Hancock opened 13,000 new accounts, and overall deposits grew by $1.5 billion.

It’s often hard to know whether someone will honor his or her commitments to us. We’re bound to make mistakes. And if we bestow trust and are betrayed, it’s a costly lesson. But we also can be wrong in the other direction, by distrusting someone who would actually deliver exactly as promised. Walking away from what could have been a mutually beneficial deal is expensive, too. But since we never get to see what we missed, we never get comparable feedback about being too suspicious.

In sum, don’t over-react to the discouraging news from psych labs about broken promises and breaches of trust. Professor DeSteno himself advises that if you know nothing about a potential partner’s situation and can’t interact face-to-face with them, you should probably tilt towards trust. “Most accepted models suggest that a bias toward trusting is better when you have no information to go on,” he says, “as the gains from long-standing relationships tend to outweigh one-time losses.”

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Harvard Business School Professor Michael Wheeler is the author of The Art of Negotiation: How to Improvise Agreement in a Chaotic World (Simon & Schuster).

He has been a key figure at the renowned Program on Negotiation (PON) at Harvard Law School since its founding 30 years ago. During the 2013-14 academic year, he continues to teach in executive programs at HBS and PON, and is also a visiting professor at Harvard’s Kennedy School of Government.

Photo "Paying off Debt" by Quaziefoto, via Flickr Creative Commons