Apologies are issued if there was a violation of trust from one party to another. Economics has a fair amount to say about trust and the subsequent action of trust violations. First I will describe what economists define as trust: The understanding of both parties costs and benefits concerning the other participant’s deviation. Second, I will describe how one can restore a trusting relationship by introducing costly actions after deviation, so called apologies. The theory and evidence indicates that the costlier the apology for the person who deviated, the higher the chances of apology acceptance. I will argue that apologies are signals, and only costs can differentiate honest signals from cheap talk.
Trust
The common understanding of trust is a warm feeling regarding another person, a company, an agency, a government, or even oneself. Economists are not in the business of thinking along those lines. They only have costs and benefits in sight. So it comes at no surprise that I will try to explain trust with sticks and carrots.
If you are in an exclusive relationship you trust the other person not to cheat on you, as does the other person vice versa. In terms of costs and benefits this means that I think to know that the other person is better off not cheating on me. This means I need to understand the other persons utility function (Utility funtion paper). If I think that the person is better off not cheating on me, then I think she is benefitting from having an exclusive relationship with me, and she will endure tremendous discounted future costs from cheating on me. On top of that I can employ jealousy as a costly interference for the availability of mate shopping. In addition a marriage might help as a commitment device in order to increase costs of deviation (blog). Bottom line: Trust is not a warm feeling towards someone else, it is rather an attempt to understand the cost/benefit analysis of your partner.
Apologies
Let’s assume that someone deviates from agreed arrangements. You thought they are better off acting according to consensus, but they have cheated. They have signalled that the benefits of cheating are higher than the costs.
In order to restore the partnership, one has to implement a costly device, convincing the other party that the costs of cheating are in fact higher than the benefits. This can give the cheated person the confidence that it won't happen again cause an even costlier apology will be necessary.
Let's put this in numbers. I “trust” my girlfriend. I think if she cheats on me she will get “10 excitement benefits” but “20 angry kruxi costs” (Let’s assume I will find out 100% of the times she cheated). Given she now does cheat on me I can safely say I was wrong. Her “excitement benefits” > “angry kruxi costs”. Lets say I was right about the 10 benefits, but costs are actually only 5. I must thus assume that this will happen more often since the cheating action has shown to be rational and utility maximizing. The agreement of an exclusive relationship is thus void.
…Unless there is a kind of apology that increases costs to a sum total bigger than 10 (thus bigger than benefits). I have experienced this myself. This sometimes happens in descending auction style. First there is a phone call (cost 1): not enough. Then there is a long text (cost 2): still not enough. There is a handwritten letter (cost 2): indifference. Then there is personal gift (cost 4): costs > benefits. At this point we have reached our trusting cost/benefit analysis. Thus both parties know that cheating and wanting to continue the relationship will mean
Benefit: “10 excitement points”= 10 Benefit
Cost: “5 kruxi angry costs”+ “ 1 phone call cost” + “2 long text cost”+ “ 2 handwritten letter cost” + “4 personal gift cost”= 14 Cost
Total: 14 cost > 10 benefit
I can thus continue this relationship knowing that she will not cheat because the excitement won't be bigger than the costs of me being pissed and her having to go through the costly apology ritual.
Evidence
Some of the coolest econ experiments have been done regarding apologies. Ho and List have co-othered papers with Uber and Lyft data. Here people who had to wait longest for their rides (95 percentile) were issued an apology. These riders were randomly selected to either get no apology (control), a basic apology, a status apology, or a commitment apology. These treatments were then also underlined with monetary contributions. This indicates a ladder of costly apologies. In the Lyft randomized control trial evidence was strong that costlier apologies were more welcomed, and resulted in more rides of these recipients.
Conclusion:
We trust people to not do something if we think that their costs of doing that thing exceeds the benefits. If we were wrong and the person did that thing he can restore the relationship by implementing costly apologies to restore our belief of costs > benefits. The model I presented is very simple. It can get as complicated as you want. Some obvious incorporations are: 1) probability of finding out about a deviation, 2) discounted costs of future apologies, 3) Bayesian updating of cost/benefit beliefs of the other. Once again, this is an attempt to explain social behaviour with economics rather than with psychology. Trust and apologies are cost/benefit related and feelings are just a result of it.
Further Reading:
I attended classes of Professor Hamill at OX who specializes on trust. She wrote fantastic papers and books on taxi drivers trust and medical trust (which might also be informative of trust regarding covid 19 vaccine).
I love the paper by Ox Professor Federico Varese “Offline and Local: The Hidden Face of Cybercrime” It tackles the issue of trust among cyber criminals. The seeming puzzle of not being able to punish your partner in cybercrime is solved by cyber criminals living in the same town and knowing each other. Râmnicu Vâlcea, a notorious Romanian town dubbed “Hackerville” is a hub for organised criminals who use the web to net millions in ill-gotten profits.
I have previously argued that the high incentives to cheat in diamond trade means that high extra-legal costs need to be put in place. Thus Jewish diamond trade in NYC flourishes, since within this community, cheating will carry huge societal costs for oneself, ones’ children, and family. Both parties know that if anyone want to steel diamonds, their interwoven families will suffer immensely, thus no one is willing to cheat. Therefore, trust is a function of understanding someone else’s costs and benefits, and being sure that deviation will lead to costs > benefits.
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