NEW YORK - Conflicts of interest are everywhere. In finance, analysts tout shares in companies as their colleagues down the hall sell investment banking services; in accounting, the same firms (until very recently) provided lucrative consulting services to the same companies they audited. Drug companies supply all manner of perks to doctors who then prescribe their medicines.
Some of these conflicts are inevitable--others are not. But the solution when they occur is often said to be full disclosure. As long as the guest on CNBC tells the home viewer that his bank may be in bed with the stock he's picking, all is well. Your doctor who prescribes you Lipitor just got Laker tickets courtesy of Pfizer (nyse: PFE - news - people ), but he told you about it. So what if Goldman Sachs (nyse: GS - news - people ) is representing both the New York Stock Exchange and Archipelago Holdings (amex: AX - news - people )--everybody knew, so it's cool, right? (see: "The FDA's Conflict Of Interest Problem", and "The NYSE's Conflict Of Interest Olympics").
Maybe not. It turns out that disclosing conflicts doesn't always solve the problem, and it may even do more harm than good. That's the conclusion of a recent study by George Loewenstein, Don Moore and Daylian Cain, "The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest," published in the Journal of Legal Studies.
Most people think that if they know that their adviser--whether a doctor, a lawyer or a stock broker--has a conflict, they can adjust, take the advice with a grain of salt, as the saying goes. But it turns out they cannot, according to Loewenstein, an economist at Carnegie Mellon University.
The reason in part is that most people don't understand what the conflict of interest does in the first place. A doctor may rightly say that he wouldn't sell his advice for the price of a basketball ticket; an analyst will argue that he gets paid for being right, not for generating investment banking fees (at least recently). Goldman Sachs will say that no one deal fee is worth risking its reputation for probity. They are all right; but that's not how it works, Loewenstein says.
"People have this very limited model of conflicts of interest," Loewenstein said in an interview. "They think in terms of corruption, but the larger problem is unconscious bias." It's not that the professional accepts a quid pro quo and consciously or intentionally misrepresents his advice, "[The] bias is more frequently the result of motivational processes that are unintentional and unconscious," he says in his study.
In other words, a doctor might over time shade his advice to conduct procedures that profit him, or prescribe drugs from companies that have funded his research or whose rep has simply bough his medical students a few lunches. It happens without the adviser knowing it. People have a way of choosing the courses that serve their interests. Loewenstein's experimental studies testify to the point.
Full disclosure is often though to be a solution. But it can backfire. First, people can't really judge the effect of the conflict of interest on the advice they are receiving. Second, because most people are inclined to trust their advisers (after all, they picked them because they are trustworthy) when they have been informed about conflicts, they feel sure that their advisers can overcome them. When the adviser lays bear the conflict himself, the recipient of the disclosure trusts him all the more.
The fact of the disclosure may also affect the advice. Disclosure might deter advisers from giving biased counsel. "On the other hand, advisers might be tempted to provide even more biased advice, exaggerating their advice in order to counteract the diminished weight" the recipients will give it, Loewenstein writes.
Some professionals might even feel a "moral license" to give bad advice. This license may even have a legal component. For years, and to this day, tobacco companies like Altria (nyse: MO - news - people ) and Reynolds American (nyse: RAI - news - people ) cited the warning labels on cigarette packages as a key aspect in their defense of smoker lawsuits.
Of course, it's not possible to get rid of all conflicts of interest. When a salesman from IBM (nyse: IBM - news - people ) is selling a computer system, it's not reasonable to expect him to explain the merits of the rival Dell (nasdaq: DELL - news - people ) system. But some conflicts can be avoided--drug companies giving freebies to doctors is an obvious candidate, Loewenstein says. And assuming that disclosure wipes the problem away is a serious mistake.
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