February 10, 2014 by Liberty
The misrepresentation of facts is one of the fundamental problems that the plagues the world today. Some people outright deceive others for their own benefit. Many more people deceive others through their own lack of motivation. They pick the safe answer instead of the true one (diversify instead of focus on quality and truth.) There are ways how to know who you can trust. Knowing the difference between the people that you can trust, and those you shouldn’t trust is a problem that you should confront daily. Many people choose to avoid situations that require answering the question of trust but that has some serious consequences.
Avoiding The Problem
Trust is one of the most powerful positive factors in history. People need to have some trust in one another to have a cooperative relationship. Imagine you’re about to go to dinner with a friend and he or she tells you, “This is a great restaurant. The food is amazing but… there is one problem. Every once in a while the cook poisons a meal. But… Otherwise it’s great!”
That’s an absurd sounding sentence because trust is so deeply ingrained in our daily lives. Most of the trust people have isn’t ever even explicitly talked about. Even something as simple as driving down the road requires trusting hundreds of people that you’ve never even met.
It’s not very pleasant to think about but when you’re on the road, how do you know that the person in the other lane coming in your direction will stay on their side of the road? There is no way to know this. They could be crazy, suicidal, used to driving on the other side of the road, or anything else. Your fate is in the hands of someone you don’t even know. This deeply ingrained trust can lead to many people into ignoring the problem completely in even more aspects of their life.
Ignoring the blindness that this allows, there is another fundamental problem. Many times, with advertising in particular, the default option is to not trust another person. When an ad pops up on the television touting a new product, people instantly assume the person selling is being untrustworthy. While it may protect you from that shabby weight loss product, it also keeps you from maximizing your options.
When you’re able to recognize how to know who you can trust, you’re able to take reasonable chances that can dramatically improve your life. How much you should trust can usually be decided by one simple factor.
The difference between a person you can trust, and a person you shouldn’t trust comes down to how much skin the person has in the game. For example, if a person is selling a product saying you’ll be able to make a million dollars in real estate, you should look at a number of different factors relating to what that seller has to lose.
Is the person selling the book invested in real estate. If they’re saying that there is a ton of money to be made in real estate, then it’s only reasonable to expect they have some of their own capital invested in it. That means, if they’re wrong and real estate tanks in price, they will suffer the consequences.
Next, you want to look at the reputation of the person making the claims and what they have to lose in that. If (insert trustworthy name here) was making the promise, they are less likely to be willing to risk lying for a short profit. This is why companies use celebrity endorsements. How much can you find about the source of the information and do they have a reputation to lose? Those with a reputation to lose instantly have some skin-in-the-game. Fly by night organization have little to none.
Looking for skin-in-the-game can be applied to any aspect of your life. If you’re buying shoes on ebay then you look at the sellers feedback. If they have a positive record that you could damage with a single complaint then you can be confident you’re probably going to be alright.
Naturally, the more risk involved, the more skin-in-the-game you should expect to see before relying on trust.
This method does have one big issue to some people:
You Can’t Trust The Wright Brothers
(This isn’t a historically accurate example but it’s based on the stories typically told. It’s just a thought experiment.)
What if the Wright Brothers, while tinkering with their new plane, offered to let you take the first flight in it? Naturally, you would jump right in and soar, right? Well… it’s not that simple. The Wright Brothers had a terrible record before their one success. So, let me ask it differently.
So, what if two wacko bike makers with a reputation for building failed flying devices offered to let you risk your life in one of their death traps?
Unless you happen to be a bit of a daredevil, that’s a risk most people wouldn’t be jumping at.
Ideas, things, and people can be successful despite being horribly unintelligent risks. (In fact, the dumber the risk, the more revolutionary the change.)
When you’re looking into people who you can trust, it’s usually safer to assume you can’t trust until you’re able to find their skin-in-the-game. Sometimes, people with absolutely nothing to lose can be trustworthy but that doesn’t make it a smart risk to take.
Where’s The Skin?
One of the fundamental problems with government today is the lack of skin-in-the-game. Politicians are able to outright lie in their speeches to get elected. In just about any other field this is considered fraud. Banks are another one of the most obvious examples of the lack of skin-in-the-game.
The United States government insures bank deposits. That means that banks can risk all of their money and (apparent since the bailout) risk absolutely nothing. The CEO’s are paid in stock options that only pay if they go up. The CEO’s don’t lose any money if the company goes bust. They have unnatural incentives to risk the company for profit. The banks can make this work with the United States government protecting all their downside.
When people are exposed to risks they’re more likely to make less risky decisions. The opposite is also true. By cutting the risks for certain people or organizations (like banks) government is giving them the option to take larger risks without facing the consequences. When those larger risks cause consequences, the government that caused that risky behavior in the first place says that more risk needs to be removed. It’s a never ending cycle.
How to know who you can trust comes down to knowing what someone has to lose. If someone doesn’t have an obvious incentive to be right (or worse off, a disincentive to be right) then you need to be watching your back. Trust is all about skin-in-the-game.