People were recruited and paid $10 for showing up. Then they took seats in a large computer lab and were matched up in pairs, but this done completely anonymously so that no one knew (or would know) the other person in his or her pair. One-half of the participants (decision-maker 1s) then had the opportunity to send none, some or all of their $10 show-up fee to the other person in their pair. Whatever is sent is tripled. So, if $4 was sent, the other person would have $22 ($4 tripled, plus the $10 show-up fee the second person receives). The second decision-maker could then send some amount of this money back to decision-maker 1, but need not. This is how we produce a social signal of trust: decision-maker 1’s only reason to transfer money to the other person is because he or she trusts that that person will understand why the money is being sent to them, and in turn will return some to them (be trustworthy)...
The Nash equilibrium says that if you are decision-maker 2, you should prefer more money than less so you should not be trustworthy (that is, return any money to decision-maker 1). Decision-maker 1 should realize this and therefore never send anything to the second person. Yet we see abundant trust in the lab and in daily life.
I am skeptical of these laboratory studies. I think that human behavior in situations with a strong personal component is different from human behavior in an impersonal market. I see economics as studying behavior in the context of markets.
For Discussion. If there is a hormone that increases trust and co-operation, would raising the level of that hormone be good for people?