Sunday, July 15, 2007

Trust Distance Decay

Another item from the Sunday NYT Business section, this one concerns the geography of trust. Investment decisions are influenced by "neighborly advice" or in some cases, local knowledge:

This possibility led the professors to devise a number of complex tests to determine the actual role of word of mouth in investor decisions. One of the more intriguing tests took advantage of a barometer designed by Robert D. Putnam, a professor of public policy at Harvard; it measures the level and intensity of social interaction in a community. States with the highest scores in Professor Putnam’s index were North and South Dakota; Alaska and Hawaii ranked lowest. Professor Ivkovich and Professor Weisbenner found significantly more herding behavior in high-ranking states.

While the herding mindset can be both good and bad for your investment portfolio, much of Putnam's research points out that our communities of trust are disintegrating. One force tearing apart our social networks is migration. The odds are increasingly long that we will toil in the same town where we grew up. Furthermore, for a variety of reasons, we are less connected to our neighbors.

Of course, other networks develop, such as at the office and online. However, Putnam contends that internet interaction is an inferior way of building trust (supporting a Spiky World geography). Trust over distance, for better or for worse, is an old problem. Throughout history, various technologies have overcome the impractical need for face-to-face interaction. What virtual communities need is a similar innovation that renders moot the fact we may never meet.

No comments: