Disclosing Conflicts of Interest May Not Help

Forcing advisers to disclose conflicts of interest, thereby making it more difficult for them to influence clients in a particular direction, can lead the advisers to make more exaggerated claims:

Disclosing Bias Doesn’t Cancel Its Effects, by M.P. Dunleavy, NY Times: ...Nobody likes to be at the mercy of an expert, especially of those who charge for their services and whose trustworthiness can be hard to assess. Mechanics are a common source of this frustration, but there are many others: doctors, plumbers, financial advisers, real estate agents and technical support people, to name a few.

We ordinary folks have to gauge, sometimes on the spot, whether a specialist’s opinion is worth the price, and whether that person stands to gain... [R]esearch suggests that consumers would do well to think twice before assuming a professional’s advice is worth the price.

In a study published in 2005 in The Journal of Legal Studies, 147 subjects were asked to assume either the role of an adviser or of someone depending on advice. The researchers set up two experimental conditions. In both, there was a conflict of interest: the advisers stood to gain financially if the clients followed their biased advice.

In the first condition, in which the advisers did not disclose their conflict of interest, they knowingly gave misleading advice. In the experiment, the clients lost money because they followed the advisers’ suggestions.

In the second condition, the advisers disclosed their conflict of interest: they conceded they would benefit if the clients heeded the advice. But coming clean didn’t have the expected result. Although the clients, now aware that their advisers were biased, were more skeptical about taking the advice, “they didn’t discount it enough,” said George Loewenstein, a professor of economics and psychology at Carnegie Mellon University and a co-author of the study...

And the advisers, still determined to make more money, exaggerated their claims. “The advisers ended up making even more money than in the first condition, which is exactly the opposite of what you would hope for or expect,” he said.

Professor Loewenstein is particularly interested in this dynamic because he thinks it is more common than most people realize. In a similar study not yet published, he found that would-be home buyers tended to overvalue the opinions of real estate agents, even though the agents disclosed that they were being paid by the sellers and even though the buyers had enough knowledge of the properties in the area to question the agents’ opinions. ...