Financial markets offer a case study of how regulation, transparency and verification can help build trust — and even restore it when it collapses.
America’s financial industry has long had trust issues. Never mind the Great Financial Crisis of 2007-08; mistrust of the markets dates back to at least 1929, if not the Dutch East India collapse of 1769. But this history has an upside: Financial institutions have a lot of experience creating systems to build, maintain and restore trust — and have learned lessons that can be applied across the economy.
When it comes to finance, says Nobel laureate Robert C. Merton, there are two essential components of trust: People need to believe their counterparty is acting honorably, and that it is competent. He likes to say that he trusts his children to act in his best interest, but not to operate on his knee. And he would trust a doctor to operate on his knee, but not if he had a side hustle selling body parts.
The problem is that, in an economy as big as America’s, it’s impossible for any one person to know everyone they transact with. So they have to rely on other methods of inferring trust: transparency, verification and regulation.
Continue reading the entire piece here at Bloomberg Opinion (paywall)
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Allison Schrager is a senior fellow at the Manhattan Institute and a contributing editor of City Journal.
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