In every exchange relationship there is the possibility that one of the parties will act in bad faith. A babysitter might watch Netflix instead of keeping an eye on the children; a brokerage firm might earn more commission by pushing risky investments; a travel agent might book customers on his uncle’s overpriced jungle tour. There are, of course, a number of ways to guard against such opportunism. Contracts, for instance, set expectations, align incentives, and stipulate penalties. Professional organizations hold their members to certain standards. Insurance policies and lawsuits can protect us from negligence or deceit.According to Kent Grayson, a professor of marketing at the Kellogg School, there is another common safeguard that people rely on in the marketplace: the power of reputation. Whether we are buying pharmaceuticals, accepting website “terms of service,” or trusting mortgage brokers to engage us in large financial transactions, we tend to believe that organizations care about their reputations enough to treat us fairly.“The problem,” Grayson says, “is that people assume they are protected by the invisible hand of reputation in ways that they’re really not.”
Source: We Trust Reputation. Should We? – The power of reputation might expose us to greater risk.
