The Dirt On Coming Clean: The Perverse Effects of Disclosing Conflicts of Interest
Disclosures are designed to help unsophisticated users understand conflicts of interests. However, lets invert this notion, could it be that disclosures actually only help sophisticated investors who do not fall prey to psychological/social biases. It turns out that when users have little experience in an endeavor (as they do with most large/important purchases) they are likely to defer to advisors regardless of lengthy detailed disclosures.
Abstract (Via Cbr.Cmu.Edu)
Conflicts of interest can lead experts to give biased and corrupt advice. Although disclosure is often proposed as a potential solution to these problems, we show that it can have perverse effects. First, people generally do not discount advice from biased advisors as much as they should, even when advisors’ conflicts of interest are disclosed. Second, disclosure can increase the bias in advice because it leads advisors to feel morally licensed and strategically encouraged to exaggerate their advice even further. As a result, disclosure may fail to solve the problems created by conflicts of interest and may sometimes even make matters worse.
Excerpts (Via Cbr.Cmu.Edu)
Perhaps, however, the benefits of disclosure should not be accepted quite so quickly. For disclosure to be effective, the recipient of advice must understand how the conflict of interest has influenced the advisor and must be able to correct for that biasing influence. In many important situations, however, this understanding and ability may be woefully lacking. For example, imagine a patient whose physician advises, “Your life is in danger unless you take medication X,” but who also discloses, “The medication’s manufacturer sponsors my research.” Should the patient take the medication? If not, what other medication? How much should the patient be willing to pay to obtain a second opinion? How should the two opinions be weighed against each other? The typical patient may be hard-pressed to answer such questions.
Conclusion (Via Via Cbr.Cmu.Edu)
The general conclusion that disclosure is most likely to help the sophisticated estimator is somewhat dismaying, since unsophisticated estimators are exactly the ones who are most likely to need protection from exploitation. Such naive recipients of advice would include individual investors who rely on information from stock analysts (or from auditors), individual home buyers who rely on advice from realtors, or the typical hospital patients who rely on medical professionals for advice. The paradigmatic example of the person who disclosure is unlikely to help is the medical patient who deals with only a small number of doctors, does so infrequently, lacks expertise in medicine, and enters the patient-doctor relationship trusting the doctor. This person is unlikely to know how the physician’s conflicts of interest—or the disclosure of these conflicts—is likely to influence the physician’s advice, and is likely to be uncertain regarding what to do about it. A final consideration regarding the limited protection that experience can provide is the fact that many of the most significant decisions people make in their lifetimes are made only once or but a small number of times.