How Honesty Lowers Business Transaction Costs: A Strategic Insight

Before we begin today’s sharing, I’d like to ask if you’ve ever had this thought:
Is it because I’m too honest that I keep getting deceived? Is it because I’m too sincere that I can’t make money?

What kind of feeling is this?

Your AI-powered meeting assistant — Huddles

Smarter agenda , valuable conclusions

You say we must independently develop, insist on product originality, and create a brand that consumers love. But when you look around, those who copy, imitate, and counterfeit have already made a fortune.


You say a few of us should partner up, achieve results first, and when we make money, we can talk about everything else. But when you look at it, by the end of the year, profits go to profits, they share, and losses go to losses, and you end up carrying the burden.
This feeling of being harshly hit by reality is very uncomfortable.
But please forgive me for saying something heart-wrenching: an honest heart and a business mind are two different dimensions. Failing to make money may be because your business mind still needs to learn, not because of your honest heart.
Moreover, honesty can make money.
Why do I say that?
Like this. Let me tell you two interesting stories, and you will understand.

01 – The Subway without Ticket Checks

The first story is about Munich, Germany.

Twenty years ago, in 2003, I visited Munich, Germany. Due to work, I needed to travel from one end of the city to the other. So, it was my first time taking the subway in Germany.
In German subway stations, I saw a particularly interesting machine: an automatic ticket vending machine.
You might say, what’s so special about an automatic ticket vending machine? Don’t subway stations all over the world have them?
In 2003, the automatic ticket vending machines in German subway stations were a bit different. Passengers could choose the type of ticket they needed from the machine, such as single tickets, short-distance tickets, three-day passes, weekly passes, family passes, and more. After inserting paper money or coins, the machine would automatically dispense the ticket and change. However, because different tickets had different “validity periods,” passengers had to input the “validity period” of the ticket they purchased themselves.
Inputting the “validity period” of your subway ticket was something I had never seen before.
After completing a series of ticket purchase operations, I boarded the subway. In Germany, the subway, along with other public transportation, forms an extensive network. To facilitate passenger travel, German subway stations are often located at stops for local high-speed trains and bus stations. In some places, they even share the same waiting area. Therefore, crowding is common at German subway stations.
However, while moving through the crowded crowd, I had a strange feeling: I seemed to have forgotten something.
What could it be? Did I forget my documents? No, I had them. Did I forget my work ID? I had that too. I kept thinking and thinking. It wasn’t until I had been on the subway for several stops that I suddenly remembered: I seemed to have forgotten to validate my ticket.
That’s right. How did I enter without validating my ticket? At that time, I had been living in Shanghai for several years. I distinctly remembered that in Shanghai, you had to validate your ticket and pass through the turnstile when entering the subway. However, in Munich, I didn’t see any turnstiles, and I didn’t see any ticket inspectors. Could it be that I accidentally took a shortcut?
Well, I didn’t dwell on it. I thought I would explain the situation to the staff when I got to the station, and that would be it.
But when I actually arrived at the station, I realized that there were still no turnstiles, and there were still no ticket inspectors. All passengers just walked out in big strides without any “obstacles.”
What was going on? Where were the turnstiles? Where were the ticket inspectors? Did they all disappear?
Later, I learned that they didn’t disappear; they had never been there in the first place. German subway stations are completely open. There are no turnstiles, no electronic ticket gates, and no manual ticket inspectors. In the bustling subway stations, there isn’t even a fence.
The reason for doing this is because they trust everyone’s goodwill. They believe that you will voluntarily and truthfully purchase a ticket. They believe that you will abide by the spirit of the contract behind the act of “buying a ticket.” They believe you won’t violate the simple social norms of “buy a ticket when you ride.” This spirit of mutual trust and cooperation also exists in many other corners of German society.
But wouldn’t there be people who try to evade fares for a small gain?
Of course, there are. Therefore, subway stations prominently post notices stating that fare evasion will result in fines several times the ticket price and will be recorded in one’s integrity record. In severe cases, there is even a risk of imprisonment. At the same time, public transportation companies implement random checks, and staff conduct spot checks on tickets at irregular intervals.
By relying on this “trust in the goodwill of the public, check the malice of a few” approach, the fare evasion rate on German subways has consistently remained relatively low.
After reading this story, what are your thoughts?
You don’t have to answer immediately. Let me tell you the next story first.

02 – The Unchanging Road in Seattle

The second story is about Seattle, USA.
Due to my past work experience, I often had to travel to Seattle, USA for meetings. So, I have some experiences of driving in Seattle.
Once, I was driving alone from downtown to an industrial park. On the way, I had to cross a big bridge. It was a route I couldn’t avoid.
Every time I reached this bridge, I would feel particularly frustrated. Why? Because it was always so congested. Yes, just like the scenes you see at some highway entrances and exits during holidays. When you looked ahead, all you could see were endless rows of cars. You had no idea what was happening up ahead. But everyone and every car seemed to be frozen in place, not moving at all.
The traffic on that day on the bridge was just like that. All the vehicles were stuck in four lanes.
But did you know? Apart from those four lanes, on the far left side of the bridge, there was actually a “5th lane.” However, except for the occasional few cars speeding by, this “5th lane” was almost empty throughout.
At the time, I thought, isn’t this silly? There’s an empty lane, but they choose to stay stuck here. They really don’t know how to adapt.
Later, I found out that I was wrong. It wasn’t that people didn’t want to use it; it was because that “5th lane” was the carpool lane.

A carpool lane, also known as a “HOV (High-Occupancy Vehicle) lane” or “ride-sharing lane,” is a dedicated lane on a roadway reserved for vehicles carrying more than one occupant. For example, if you are driving with a coworker after work, with two people in the car, you can use this lane. Similarly, if you are traveling on the weekend with your spouse and children, with at least three people in the car, you can also use this lane. On the day you mentioned, since I was the only person in the car, I couldn’t use it.

Huh? What a strange setup, isn’t one person, two people, and three people all “one” car?
In fact, the purpose behind these “carpool lanes” is quite simple: to alleviate traffic congestion.

In the United States, many households have more than one personal vehicle. Imagine if every morning when couples went to work, the husband used one car, and the wife used another. Would the traffic situation in the city be manageable? If every family traveled this way, it would be a miracle if the roads weren’t congested. Therefore, the introduction of “carpool lanes” is actually encouraging households with more than one car to try to use only one vehicle for commuting or even use alternative modes of transportation.

As a result, many states in the United States have established carpool lanes, and some of these lanes can stretch for over 700 miles.

It’s indeed a clever solution. However, there is another side to this cleverness.

So, can those drivers who are alone on the road resist the temptation of carpool lanes? In front of them, there is a sea of cars, while beside them, there is a wide-open road. Will no one be tempted to break the rules for the sake of convenience? After all, you can’t always know how many people are in my car.

Of course, there will be some who do. So, it’s a matter of “trusting the goodwill of the public, while checking the malice of a few.” For the vast majority of people, I believe you will consciously and truthfully use the appropriate lanes. I believe you will adhere to the spirit of the contract behind the “rules.” I believe you won’t violate the simple social norms of “please do not break traffic regulations.” However, for a very small percentage of people, we use traffic police and surveillance cameras to conduct random checks. Once caught, they face hefty fines.

Therefore, if you encounter a road with a carpool lane today, you are likely to see a scene like this.

03 – The Unchanging Direction

By now, you might be thinking, “Well, these are indeed interesting stories. But what do they have to do with making money?”
They are related, actually. If you look closely, you’ll find that the essence of both these stories is the same: using honesty to reduce transaction costs.
What are transaction costs?
Business isn’t just about how things are produced; it’s about how things are exchanged. Because there is exchange, there is business. However, because there is exchange, there is almost always “information asymmetry” and “lack of trust.” Transaction costs are the costs incurred to overcome “information asymmetry” and “lack of trust.”

What is information asymmetry?
It means I know things that you don’t. For example, you think the cantaloupe from my farm is exceptionally delicious, and after trying it, you want to buy some. So, I sell it to you for $100 per pound. Or, you want an imported gaming console that’s not available domestically, and I sell it to you for $10,000 each. However, in reality, the cost of the cantaloupe to me was only $20 per pound, and I bought the gaming console for only $1,000.

But you don’t know where to find cantaloupe for $20 per pound or an imported gaming console for $1,000. So, you can only buy from me. At this point, the problem of “information asymmetry” is something I’m helping you overcome. Thanks to me, you discover that there are cantaloupes this delicious and gaming consoles this exciting in the world. The profit I make is the transaction cost you pay to overcome “information asymmetry.”

Later, with the advent of the internet, achieving “information symmetry” became much easier. You can just search online for cantaloupes, directly sourced from the origin, at $30 per pound, or imported gaming consoles, sold directly by the manufacturer, for $2,000 each. You no longer need to buy from me. At this point, the internet helps you further reduce “information asymmetry,” significantly lowering transaction costs.

So, what is a lack of trust?
It’s when the farther away you are from me, the less you trust me. Even though cantaloupes online are only $30 per pound, you’re still skeptical. It’s cheaper, but I don’t know this person; what if I pay and they disappear? Well, forget it, I’d rather buy from my usual source, even if it’s more expensive. At least I won’t get cheated. So, you end up buying from me. At this point, I’m helping you overcome the problem of “lack of trust.”

Later, with payment platforms like Alipay, you can make the payment first, and the money is held by Alipay until you receive the goods. After that, Alipay transfers the payment to the seller. This makes you more confident about making online purchases. At this point, Alipay helps you further reduce the issue of “lack of trust,” significantly lowering transaction costs.

So, as you can see, the so-called progress in business is actually about continuously overcoming “information asymmetry” and “lack of trust” to lower transaction costs.

The cost of purchasing and installing turnstiles, as well as the wages of ticket inspectors, are all transaction costs incurred to overcome “information asymmetry” and “lack of trust” in the process of “buying a subway ticket.” Similarly, the cost of purchasing and installing surveillance cameras and the salaries of traffic police are transaction costs incurred to overcome “information asymmetry” and “lack of trust” in the process of “driving on the highway.”

But because of honesty, the transaction costs in both of these cases have been significantly reduced.

Let’s do a simple calculation.

Suppose a subway station spends $100,000 a year on turnstiles and ticket inspectors. However, because of your goodwill and trust in the goodwill of the public, you only need to spend $50,000 to complete the “ticket inspection” process. So, you can confidently say, “I only need $70,000, and I’ll take care of it.” The extra $20,000 is the money you can earn, and the saved $30,000 is the money you can save for consumers.

Of course, the real situation is much more complicated than this simple math problem. However, as long as this calculation adds up, this makes sense in terms of business logic.

So, as long as you can lower transaction costs, you will almost certainly make money because “transaction costs” themselves are an important indicator used to measure business progress.

Conclusion

The era where good people can make money is indeed on the horizon. In the past many years, you could often feel the truth in the saying that “cutting corners and unethical behavior lead to big profits.” However, an increasing number of stories are proving to us that honest, trustworthy, contract-abiding, and value-driven individuals can not only survive but also thrive.

If there’s any remaining dividend in today’s business world, I believe it’s the dividend of values.

Let’s hope that all of us can strengthen our business acumen and, more importantly, hold onto our integrity.

We encourage each other in this endeavor.

News Post

Other Posts

09 Nov

How to Create an Effective Meeting Agenda: A Step-by-Step Guide

In the realm of business communication, the significance of a well-structured meeting agenda cannot be

12 Jan

Optimizing Agile Coaching: 8 Best Practices

In the ever-evolving landscape of modern organizational dynamics, agile coaching has emerged as a pivotal

08 Nov

5 Key Sections Every Meeting Minute Should Have

Minutes are a summary of what was said and decided in a meeting. The format

25 Nov

7 Key Strategies for Leaders to Shape Organizational Culture

Leadership culture, a pivotal aspect of any organization, refers to the collective behaviors, practices, and