The Power of Shame and the Rationality of Trust

Experimental evidence and a host of recent theoretical ideas take aim at the common economic assumption that individuals are selfish. The arguments made suggest that intrinsic “social preferences” of one kind or another are at the heart of unselfi sh, pro-social behavior that is often observed. I suggest an alternative motive based on “shame” that is imposed by the extrinsic beliefs of others, which is distinct from the more common approaches to social preferences such as altruism, a taste for fairness, reciprocity, or self-identity perception. The motives from shame are consistent with observed behavior in previously studied experiments, but more importantly, they imply new testable predictions. A new set of experiments confirm both that shame is a motivator, and that trusting players are strategically rational in that they anticipate the power of shame. Some implications for policy and strategy are discussed. JEL classifications C72, C91, D82