The Economics of Betrayal Aversion

Recent research argues that "betrayal aversion" leads many people to avoid risk more when a person, rather than nature, determines the outcome of uncertainty. Unfortunately, previous studies conflate betrayal aversion with established preference effects, including loss aversion, raising many questions about the economic impact of betrayal aversion. This dissertation answers three of these questions: Does betrayal aversion actually negatively influence social exchange as past studies suggest? Why did evolutionarily successful societies evolve to have emotions that seem detrimental to mutually beneficial economic exchange? Can we design exchange institutions to mitigate negative but not beneficial aspects of betrayal aversion? The three chapters presented provide the first rigorous evidence on the adaptive benefits of betrayal aversion, helping explain the evolutionary stable presence of betrayal-averse agents. Additionally, the findings are the first to show that institutions can mitigate betrayal aversion without decreasing rates of reciprocation.;The laboratory studies use a novel investment-game experiment that varies how strategic uncertainty is resolved, specifically changing whether or not investors are exposed to the knowledge of having been betrayed. The key contribution of the design is that it removes confounding factors present in past studies of betrayal aversion, such as loss aversion, that prevent those studies from cleanly identifying the effects of betrayal aversion. The first chapter's results provide rigorous evidence of substantial detrimental effects of betrayal aversion. Holding fixed the probability of betrayal, the possibility of knowing that one has been betrayed reduces investment by about one-third.;The second chapter studies the effect of the presence of betrayal-averse investors on the behavior of trustees. The results demonstrate that those groups including betrayal-averse agents achieve higher levels of reciprocity and more profitable social exchange than groups lacking betrayal aversion. The findings are the first rigorous evidence on the adaptive benefits of betrayal aversion, and may help future research investigating cultural differences in betrayal aversion. The final chapter demonstrates that if an institution does not force investors to avoid the knowledge of betrayal, but simply provides investors an option to avoid the knowledge of betrayal, high levels of reciprocation are maintained along with significantly higher levels of trust.