January 19, 2010
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I've been thinking a lot about trust lately, because I have a friend who just got "Madoffed."
She'd known her advisor for years. Their kids had grown up together. Then one day he ups and dies and she's told to expect an orderly liquidation. A few days later and the memorial service is now for family only. A few more days and another email, this one saying that the local securities commission has been contacted for "guidance" and that they are trying to "locate" assets.
She's probably wiped out.
And do you know, this beautiful person writes to me and says: "People rarely do things out of ill intent. Mostly, they make a decision, and then another without recognizing the pattern they're weaving. Expediency can feel as urgent as necessity, and before they know it, they're in a mire from which they don't know how to extricate themselves except by going in deeper - which takes them further away from the safe shore of their own souls."
We see a new level of distrust in our industry post-Madoff. Makes perfect sense. Clients are asking for more insurance coverage on our part, and there's more interest in our compliance processes than ever.
Our individual willingness to trust others would appear to be an ineffable thing. Hard to measure. Hard to differentiate among people. And certainly hard to see how it impacts one's financial success.
Indeed, I would have thought my tendency to trust (or not) and my pocketbook were two separate things. Until I stumbled upon a paper titled "The Right Amount of Trust." After wading through a thicket of formulae like this one - log(Yic) = ?jajTrustjic + BXic + dC + ?R + ?ic - the upshot is that the "wrong" amount of trust (more on what that means in a minute) can cost a person, over a lifetime, as much as they would have lost by foregoing college.
Whoa. Based on U.S. Census Bureau estimates, that's comparable to $900,000 in lifetime earnings.
But that's only the half of it.
After I'd wrapped my head around the "trust price tag," I had to get over the next hurdle: The right amount of trust, according to this research, is at the top of a bell curve. Too much and you get taken; too little and you miss opportunities.
Too much: "Highly trustworthy individuals think others are like them and tend to form beliefs that are too optimistic, causing them to assume too much social risk, to be cheated more often and ultimately perform less well than those who happen to have a trustworthiness level close to the mean of the population."
Too little: "...the low trustworthiness types form beliefs that are too conservative and thereby avoid being cheated but give up profitable opportunities too often and, consequently, underperform."
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