23 May 2010

The Trust Bubble

We might be facing a period where the resilience of our trust will be tested.

The term Economic Bubble has become part of our lexicon. A decade ago we endured the dot-com bubble.

Recently the US seems to be emerging from the devastating foreclosures of the real estate bubble. These are speculative bubbles – irrational price run-ups driven by a toxic combination of greed and delusion.

Our economy seems poised to be buffeted by hard-to-predict events that might burst another type of bubble – a bubble buoyed by reasonable trust. There is not an abundance of trust. Yet most of us share some level of reasonable trust – trust in our corporate and government leaders to do right by us.

Prominent companies, new economy and old, float on precarious bubbles of reasonable trust. What will be the tipping point that bursts those bubbles?

The trust bubble is unlike speculative bubbles. Absent is the irrational optimism of the dot-com bubble. And there isn’t the delusional notion that housing values will always appreciate that characterized the real estate bubble.

The reasonable trust bubble feeds on our naïve, but optimistic notions of decency, common sense, and goodwill.
  • Reasonable trust is what citizens have when they assume an entity like the Minerals Management Service, the federal agency responsible for offshore oil and gas regulation, is dutifully overseeing the redundant failovers companies like BP are reasonably expected to use when extracting our natural resources.
  • Reasonable trust is what social networking website users have when they assume that Facebook protects their personal likes, dislikes and associations from unknown and un-trusted eyes.
  • Reasonable trust is what Google Maps users have when they marvel at Street View images of their homes (not knowing their wireless router SSID and location was also recorded by the roving Google Car data collection system).
There is an unwritten contract (an implied agreement of fairness) between new economy online entities, who hold vast amounts of information about web consumers, and the web consumer. Facebook and Google have earned our loyalty, if not our trust, by providing appealing and competitively superior products.

A less noble approach is to buy our trust. Old economy corporations like BP pour millions each year into positive brand campaigns. In 2005, BP doubled its advertising budget to $150 million with the explicit goal of burnishing its environmental credentials.

The Trust Bubble is the increasing value of companies based on an accumulation of goodwill. Goodwill is an accounting term I learned about during a one-semester stint as an clueless MBA student. It reflects the possibility that a business has some prudent value beyond its assets, like the reputation a company enjoys with its clients.

Google’s widely reported Don’t be Evil slogan is still a bond of trust Google holds with most of its users. Yet, as mentioned, Google embarrassed itself admitting its Street View image collection also included inadvertent collection of wireless router information as the dexterous Google Car rolled by our houses.

Facebook’s popularity grows despite a recent and fervent backlash against their eroding privacy protections. On April 27, a group of Democratic US Senators sent a letter to Facebook CEO Mark Zuckerberg urging him to implement easier privacy controls.

Kurt Opsahl, Senior Staff Attorney at the non-profit digital rights watchdog Electronic Frontier Foundation observed,
As Facebook grew larger and became more important, it could have chosen to maintain or improve those controls. Instead, it's slowly but surely helped itself — and its advertising and business partners — to more and more of its users' information, while limiting the users' options to control their own information.
A Facebook executive answered a reader's question in the NY Times technology blog Bits, writing
We don’t share your information with advertisers. Our targeting is anonymous. We don’t identify or share names. Period.
~Elliot Schrage, Vice President for Public Policy, Facebook
Sounds reasonable, except that, as the Wall Street Journal points out in Facebook, MySpace Confront Privacy Loophole, it's not true. Not surprisingly, several social-networking sites, including Facebook, sell advertising companies data that can be used to look up your profile.

Facebook spent the past six years connecting us with friends and community – building trust and accumulating goodwill. Yet the Facebook wall posts that brought us closer to new and long-lost friends, have suddenly became a sideshow. Front-and-center is the vanishing act of privacy protection.

BP’s penny-pinching on safety and failsafe protections, followed by an ill-advised spin control campaign of its Deepwater Horizon Oil Spill, characterized by denial, finger pointing, misinformation and obfuscation, has people hopping mad.
BP's millions spent on green advertising flamed out long before the oil globs hit the gulf coast marshes.
Bought or earned, the Trust bubble is an accumulation of goodwill. A hash tag like #deleteyourfacebookaccount reaches a trending peak on Twitter within hours then virally spreads throughout the Twitter-verse for days. I await the impact of Quit Facebook Day - May 31st - with keen interest.

Without the inflated chest of goodwill, perceived and real value could vanish - poof. Our trust is worth an incalculable sum. Trust is a challenge to earn. It can disappear in a flash.

Appendix A - The Dot-Com Bubble
We experienced the dot-com bubble during 1995 through 2000. It was characterized by rapidly increasing internet sector stock prices (the bubble), followed by rapidly decreasing internet sector stock prices (the burst). The impact of the speculative frenzy over internet stocks spread throughout the market. The NASDAQ peaked at 5131 on March 10, 2000. It has yet to recover.

Source: Finance.Yahoo.com, NASDAQ composite plot

Appendix BThe Real Estate Bubble
We are in the midst of the downward trend of the Real Estate Bubble in the United States. Single family house prices have in 363 metropolises (measured quarterly by U.S. Federal Housing Agency) have dropped over 15% since 4th quarter 2006.

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