Picture the scene. You go to a financial advisor, seeking a mortgage. He tells you he is being paid commission for the product he recommends. What effect would this have on your decision?
New research shows that disclosing a conflict of interest can have counter-intuitive effects. In some cases knowing your advisor is self interested can make people more likely to buy inferior quality products.
What’s going on here?
The study mentions two interpersonal effects which are new to me. It’s to do with interpersonal dynamics:
“The first mechanism behind such increased compliance is what we call insinuation anxiety; advice recipients experience greater discomfort turning down advisors’ recommendations when a conflict has been disclosed because they fear the rejection will signal the belief that the conflict of interest has corrupted the advisor. We call the second mechanism the panhandler effect… advice recipients may feel increased pressure to help an advisor satisfy his or her personal interests once these interests become common knowledge.”
Other research cited by Dilip Soman in his book The Last Mile shows conflict of interest disclosures can enhance trust and signal the advisor’s credibility.
Again, counter intuitive.
It’s to do with anticipated regret affecting a decision where people have limited knowledge. People want to trust their advisor when they are out of their depth.
It’s to do with how we make decisions. We assume the more information the better when it comes to decision making. Soman concludes this is wrong. People have poor judgement when it comes to deciding what information is relevant, incorporating as much they can into their decision making. Complexity can have opposite intended effect.
The upshot of the research was that “disclosure does not live up to protective promise”. In practice “clients tend to use the information inappropriately and in counter intuitive ways”.
A red flag for mandatory disclosure rules
If acts of disclosure can reduce consumer welfare, then governments have to be careful about legislating to force it to happen.
If you’re interested in unintended consequences, look no further than California.
Proposition 65 legislation means organisations must put warning signs on any product which may contain chemicals which are linked to cancer or birth defects. You may have seen news reports this month revealing that coffee contains acrylamide, a possible carcinogen. Drinking coffee may add just 0.001% to your lifetime risk of cancer, but the state decree means the public should be informed using warning signs. In this and other cases, organisations post warning signs as a precaution to protect themselves from being sued. There are no penalties for posting unnecessary signs.
Unintended consequences abound
The signs act like a hall of mirrors, making it impossible to discriminate signal from noise. The result: inertia.
If coffee causes cancer, if Disneyland causes cancer, then everything causes cancer and nothing causes cancer.
- Pay attention to the overall ecosystem. Your nudge – added to those of others – may end up more like a shove. If you’re not careful it may leave a bruise.
- Focus on simplicity! Strike a balance between:
- Information load;
- Comprehensibility of formatting;
- Familiarity with concepts and ideas.
The Limits of Transparency: Pitfalls and Potential of Disclosing Conflicts of Interest -by George Loewenstein, Daylian M. Cain, and Sunita Sah. American Economic Review: Papers and Proceedings 2011, 101:3, 423–428 http://www.aeaweb.org/articles.php?doi=10.1257/aer.101.3.423