Risk Tolerance and Trust

Trust bears a close, inverse relationship with risk. When risk is high in a situation, trust levels tend to be low, and vice versa. The most common source of perceived risk is simple ignorance. A situation appears risky to us because we don't understand it, or perhaps because it involves something we've never done before. Anxiety caused by the presence of risk and uncertainty can leave us reluctant to trust others, or even ourselves. Psychologists find, for example, that one effective way to treat patients with a fear of flying is to expose them, carefully and step-by-step, to air travel. In fact, it is not uncommon for aviophobic people to learn to become pilots as a way to overcome their fear.

Economists and psychologists also accept a related trait in human nature: when a favorable outcome in any situation seems all but guaranteed, trust tends to fall away as an important concern. Our minds can turn off our need to calculate trust in an extremely low risk circumstance because we assume that trust isn't necessary. When we turn on a light switch, for instance, we don't think of the spark inside the wall as presenting a serious risk of fire, so we trust the switch without a second thought. To some extent, this thought pattern may help explain the 1990s Internet stock bubble, the 2000s housing bubble, and other cases of market euphoria, when investment success in the short term seemed as sure and simple as switching on a light, and....