To assess the explanatory power of a trust-based explanation we start by modelling the impact of trust on portfolio decisions. Not only does the model provide testable implications, but it also gives us a sense of the economic importance of this phenomenon. In the absence of any cost of participation, a low level of trust can explain why a large fraction of individuals do not invest in the stock market. In addition, the model shows that lack of trust amplifies the effect of costly participation. For example, if an investor thinks that there is a 3% probability that he will be cheated, the threshold level of.
