Jeff Livingston would like to change the way that fellow economists see the world. His research challenges the “rational pursuit of self-interest” as the standard driver of market behavior. Where did he find evidence to back an alternative view that incorporates trust? On eBay.

The Bentley assistant professor of economics has spent seven years studying the enormously popular Internet auction site. There, buyers routinely dispatch their dollars to anonymous sellers, who need send nothing until an item is paid for. In 2007 alone, with 559 million product listings, eBay users transacted more than $14 billion in trades.

“Given the standard economic model’s assumption that individuals act out of the rational pursuit of self-interest, we would expect to see many more sellers taking advantage of bidders in online auctions and fewer bidders participating because of the risk,” explains Livingston, noting that buyer ratings are the only avenue for alerting bidders to unethical merchants on eBay.

“I don’t accept the economic model that says people are purely self-interested,” adds the professor, a specialist in behavioral economics. “I see psychological, non-profit motivations.”

The results of his latest study strengthen Livingston’s case. Summarized in a forthcoming article for the journal Economic Inquiry, his research “reveals fundamental trust in one another,” says Livingston, who holds MA and PhD degrees from the University of Maryland–College Park.

For the study, Livingston examined eBay transactions for two very different products: golfing irons and video games. “Golfing irons can vary quite a lot in quality and price,” notes the professor, himself an avid golfer. “Video games are much cheaper than golfing irons, and the quality tends to be consistent.”

Sales traffic patterns of the two differ as well, with video games trading briskly and golf equipment changing hands at a slower pace. These variations helped Livingston pinpoint influences on bidders’ behavior. For example, do people generally act more cautiously in bidding on expensive items than on lower-priced products? 

Livingston found a key factor that governs the conduct of eBay bidders: their experience level. That is, auction newcomers submit similar bids whether the seller has no eBay track record or a long history of honest trades. Seasoned bidders, on the other hand, adjust their offer according to the seller’s reputation. Also, newbie bidders jump right into the auction action, while shoppers with even just a little experience bide their time, typically holding off until an auction’s final minutes before joining the fray.

“There’s a societal system that engenders trust and makes markets work,” says Livingston as he considers the study’s implications. “This system comprises laws and enforcement of laws, along with cultural norms and informal sets of rules. When buying stuff on eBay, we tend to think we won’t get ripped off, because in our society, we trust that if someone is bad, they’ll pay for it.”

The behaviorist approach is part of an ongoing debate in his field. “Economists are attempting to deal with behavioral differences,” he says. “It’s unlikely we’ll toss out the neo-classical model and replace it with one based solely on psychology, but I believe that psychology changes the model. I want to help advance this dialogue.”

The dialogue has gained importance in the current economic crisis. “The trust that people have generally in others and in our system of institutions is the lifeblood of the U.S. economy,” Livingston observes. “If we slide into a severe depression, that could shake people’s faith in the system – and it could take awhile to recover that faith.”