Nature versus Nurture: Is Trust Innate or Learned? An Analysis on Human Capital Determining Trust A thesis submitted to the University of the Philippines School of Economics in partial fulfillment of the requirements for Economics 199 Dumo, Deanne Lorraine C. Rabe, Mary Kristine P. April 2013 ABSTRACT Is trust innate or learned? This paper aims to further explore what constitutes trust. Particularly, we examine the kind of human capital influencing trust, whether this human capital affecting trust is something that is innate or acquired. Using data gathered from a survey conducted in the University of the Philippines, Diliman, we measure trust using a question we recast from the General Social Survey question. We also gather biological, cognitive and social information from the respondents. Employing two regression methods, we find that trust in general is innately determined. We find different predictors for males and females such that the left digit ratio commonly referred to as 2D:4D, is a better estimator of trust for males while math skills proxied by math intensiveness of the course proves to be significant for females. We further construe that for males, both potential IQ and EQ as captured by the left ratio, are crucial factors of human capital influencing their propensity to trust. For females on the other hand, we find that only potential IQ is an important determining factor of trust. Keywords: Acquired Human Capital; Potential Human Capital; Potential IQ; Potential EQ ACKNOWLEDGEMENTS We wish to extend our sincerest and deepest gratitude to Dr. Desiree A. Desierto for her invaluable contribution in making this research possible. We would like to thank her for the wisdom she has shared, for always shedding us light whenever we find ourselves lost in the dark, for her patience in answering every single question we have in times of doubt, and for her guidance whenever we go astray. We are forever indebted for her kindness. She will always remain as an inspiration and an epitome of erudition, for us continue pursuing learning even after we graduate and leave this University. We also extend our gratitude to Joana for helping us in conducting the survey, to our families for their moral support, our classmates especially Pam, for sharing laughter with us and our friends for their words of encouragement. Deanne would like to thank Kristine for sharing her contagious passion for research. Thesis writing has been a fun and great learning experience with you, together with Ma’am Desierto’s guidance. To my mama, papa and uncle, for giving me all the support I need. Hannah and Jazzel, for the company and stories and laughs in Spanish class, my escape from stress. ¡Gracias! Kristine would also like to thank Deanne for being a patient and a complement thesis partner. It was indeed the most fulfilling writing journey. Thank you for tolerating my craziness. Kim, for keeping me sane and cheering me up in times of near emotional breakdowns. To Pau and Karen, for always reminding me to keep fighting and carry on. Tita, for giving all the support may it be in any form. Lastly, we thank God for the wisdom, courage and strength enabling us to endure whatever things we come across with. WAIVER Relevant portions of this work may be quoted and used for research and other scholarly purposes, provided the proper citation is made. Deanne Lorraine C. Dumo Mary Kristine P. Rabe HONOR STATEMENT We attest that this undergraduate thesis we have submitted is our own. We have not cheated, plagiarized, or received unauthorized assistance in the completion of this paper. We understand that the University of the Philippines may impose commensurate sanctions and penalties for instances of academic dishonesty committed in the completion of this paper. Deanne Lorraine C. Dumo Mary Kristine P. Rabe TABLE OF CONTENTS CONTENTS Page Chapter I: Introduction……………………………………………………… 1-3 Chapter II: Review of Related Literature………………………………….. 4-7 Chapter III: Conceptual Framework……………………………………….. 8-9 Chapter IV: Data……………………………………………………………... 10-21 Data Description and Methodology…………………………... 11-14 Descriptive Statistics and Correlations………………………... 14-21 Chapter V: Empirical Implementation……………………………………... 22-37 Results of Estimation………………………………………….. 24-35 Analysis and Implications…………………………………….. 36-37 Chapter VI: Conclusion……………………………………………………… 38-39 Chapter VII: Bibliography…………………………………………………... 40-43 Appendix………………………………………………………………………. 44-53 List of Tables Page Table 1.1 Descriptive Statistics and Correlations 15-16 Ordinary Least Squares Regression Results Table 2.1 A Male 24 Table 2.1 B Female 26 Table 2.1 C Whole 28 Instrumental Variable Estimation Results Table 2.2 A Male 30 Table 2.2 B Female 32 Table 2.2 C Whole 34 Table A2 Frequency table of trust ratings: Male versus Female Subsample 45 Table A3 Frequency table of trust ratings: Math intensive versus Non-math Subsample 45 Table A4 Frequency table of trust ratings: Low 2D:4D versus High 2D:4D Subsample 45 Table A5 Frequency table of GWA: Male versus Female Subsample 46 Table A6 Frequency table of Math Intensive across the Whole Sample and Gender Subsamples 46 Table A7 Frequency table of 2D:4D across the Whole Sample and Gender Subsamples 46 Table A8 Frequency table of Running for Honors across the Whole Sample and Gender Subsamples 46 Table A9 Frequency table of Trust Ratings across the Gender and Math Subsamples 47 Table A10 Pairwise Correlations: Whole Sample 48 Table A11 Pairwise Correlations: Male Subsample 49 Table A12 Pairwise Correlations: Female Subsample 50 List of Figures Page Figure 1 Trust 10 Figure 1.1 Mean of Trust across Gender and Math Subsamples 18 Figure 1.2 Mean of Trust and GWA across Gender Subsamples 19 Figure 1.3 Mean of Trust and Running for honors across Gender Subsamples 20 Figure 1.4 Mean of Trust across Gender and Digit Ratio Subsamples 21 Figure A1 Pie Chart: Whole Sample grouped according to fields of study 44 “Can you tell me, Socrates, is virtue the sort of thing you can teach someone? Or is it the sort of thing no one can teach you, but you pick it up by practicing it? Or maybe it’s neither: virtue is something people are born with, or something they get some other way?” – Plato, Meno (70a) I. Introduction Plato, in one of his Socratic dialogues, once argued that virtues are innate within us, and that all we ever need to learn is already in us, waiting to be discovered1. The philosopher John Locke, together with the Empiricists, on the other hand, believed that our minds at birth are like clean cognitive slates (tabula rasa), and that only through our experiences can we learn2. Trust is undoubtedly one of the most significant virtues existing. Trust is an essential element in order to carry out indentures such as in financial and social contracts such as in marriage. Successful relationships also involve trust in both parties. On a macro level, trust is a determining factor during elections. People’s decision on who to vote for and whose hands they should entrust their future mainly involves confidence to the individual’s capabilities, rightful of their vote. The economy as a whole, also involves trust in carrying out market transactions. In trade and investments for instance, with higher perceived trust, doors open to the influx of investments contributing to economic growth. This also becomes the strongest pillars in establishing relationships among countries. Indeed, trust is present in any agreement. But what things really do constitute trust? More importantly, how is trust formed? Is it an intrinsic virtue to a person, or is it a learned thing which is something shaped by society, culture and environment? Kenneth Arrow, an economist and Nobel laureate, once asserted that trust is an important lubricant of the social system3; with trust, market exchanges are efficiently carried out because of economized transactions costs. For a market economy to function smoothly, trust, backed up by developed legal and regulatory frameworks, must be present (Stiglitz, 2002). Indeed, there is a plethora of literature linking trust to positive macroeconomic outcomes. Zak and Knack (2001) 1 The passages are Meno 80a-86c. 2 John Locke, An essay concerning human understanding (1847). 3 Kenneth Arrow, The Limits of Organisation (New York: Norton, 1974). 1 first studied the link between trust and economic growth wherein they found that high trusting societies achieve higher rates of investment and growth, and they went further to say that very low trust societies can be caught in a poverty trap. Zak and Knack (2001) also argue that trust is more prevalent in societies that constrain opportunism. In societies where people trust each other, citizens spend less to protect themselves from being exploited in economic dealings (Knack and Keefer, 1997). Knack and Keefer (1997) also propose that trust, together with civic norms, contribute to social capital; they said that these norms constrain greedy self-interest, encouraging individuals to promote societal interests, mainly through contribution to the provision of public goods. Trust has political and organizational implications as well. With trust, governments and large organizations function more efficiently (Coleman, 1990; Porta, et al. 1996). Financial markets develop rapidly with trust (Guiso, et al. 2000). Through its positive impact on investment and social capital, trust can spur growth and maintain national prosperity (Fukuyama, 1995). Trust is therefore a necessary virtue for a market economy to function well. Trust is also a prerequisite to cooperation. In the economics literature, trust is often regarded as synonymous to cooperative behavior. Quintessential economic examples of cooperation are when nations drop protective barriers and engage in freer trade, or when individuals unselfishly contribute to the provision of public goods. Cooperation, especially on public good or service provision, almost always leads to socially desirable outcomes. In economics, trust is defined as an “assurance” or expectation of benign behavior derived from the knowledge of the incentive structure facing one’s trading partner (Zak and Knack, 2001).