The Problem with All-or-Nothing Trust Games: What Others Choose Not to Do Matters in Trust-Based Exchange

Abstract

Many economic interactions are characterized by "all-or-nothing" action spaces that may limit the demonstrability of intended trust. We investigate whether restricting investment opportunities to all-or-nothing options affects the investment rate and propensity to reciprocate. We do this by manipulating the investor's action space in two versions of the trust game. In the all-or-nothing game the investor can invest either $10 (all) or $0 (nothing), while in the continuous game the investor can invest any amount between $10 and $0. In both games, the trustee receives the tripled investment and then can return any amount to the investor. Results indicate that investments are higher in the all-or-nothing game than in the continuous game. However, higher investments in the all-or-nothing game do not lead to higher returns. To the contrary, conditional on $10 investments, on average trustees return less in the all-or-nothing game. Although the all-ornothing action space results in greater wealth overall, it also appears to "backfire" for investors who do not benefit from the increased wealth. These results support the proposition that humans perceive intentions not only by evaluating what others do but also by evaluating what others choose not to do. JEL Classifications: C72, C91

Take the Money and Run: Psychopathic Behavior in the Trust Game

“…In any case, the use of continuous vs. discrete versions could not be fully equivalent, and may led to somewhat different results. Thus, as observed by Schniter et al (2016) when comparing this binary version of the TG with a continuous version, although investments are higher in the all-or-nothing game than in the continuous game, higher investments in the binary game do not lead to higher returns. This suggests that subjects perceive intentions not only by evaluating what others do but also by evaluating what others choose not to do.…”

Participation in and provision of public goods: Does granularity matter?

“…They study evolutionary adaptive dynamics in both cases by means of different simulations, finding that nonlinearity is what makes the difference in the final results. Schniter et al (2015) studied the continuous versus all-or-nothing comparison in "trust games", where the investor decides to invest and the trustee decides how much to return. Their results show that in the all-or-nothing case investors invest more but this does not imply that the trustee reciprocates with more money.…”