Today, there was some interesting discussion in the New York Times on human instincts for punishment and forgiveness. According to the article, researchers have found that within a population, some percentage of people (between 10 and 40%) are attuned to following their “referee instincts” by ensuring evil-doers get their due. This instinct has clearly come into play during the wide-spread financial crisis:

The public urge for punishment that helped delay the passage of Washington’s economic rescue plan is more than a simple case of Wall Street loathing, according to scientists who study the psychology of forgiveness and retaliation. The fury is based in instincts that have had a protective and often stabilizing effect on communities throughout human history. Small, integrated groups in particular often contain members who will stand up and — often at significant risk to themselves — punish cheaters, liars and freeloaders.

But allowing such impulses to play out on a grand scale can also exacerbate a crisis. The article continues:

Some experts believe that Japan’s disastrous delay in bailing out its banks in the early 1990s was caused in part by a collective urge to punish corrupt bankers, and they fear a similar outcome today.

Game theory suggests alternative approaches to resolving social dilemmas. In running various gaming scenarios in which participants respond to each others’ uncooperative behaviors, the best outcomes for all players are achieved when players follow simple tit-for-tat strategies and allow for forgiveness. On this subject, the article states:

Fortunately for the economy, researchers say, a strong countervailing psychological force is also at work: the instinct to forgive, and to cooperate…. Running thousands of computer variations … scientists have found that the strategies that pay off the most are tipped toward cooperation.

Agreed. But we’re not in a laboratory, so the quaint models of game theory aren’t so readily applicable. In real life things are so much messier, if only for the phenomenal scale on which the current crisis is playing out. It’s not even clear how the average person can actively participate in responding to the crisis. I imagine most just want to board up their windows, live off of food storage, and wait for the hurricane to pass. I imagine the average person won’t be quick to take advice from financial advisers or government officials, because so much trust has been lost in these relationships. If so, the result would be an even worse situation for everyone.

The financial crisis highlights our need for greater social trust. Humanity has learned to stitch societies into a globally integrated economy, but our natural pathways to trust have languished. The explosions in the size of the organizations and communities we associate with, the amount of information we need to process, and the complexity of the system of trade we must rely on for our well being have overwhelmed our native, instinctual ability to form relationships based on trust. How to construct a basis for trust in the modern era is, in my mind, the most important issue of our time.