Disclosing Conflicts of Interest Can Backfire

November 06, 2012

Georgetown McDonough Study Finds Disclosure Can Burden Advisees to Increase their Compliance with Advice That They Trust Less

The most popular solution to managing conflicts of interest is disclosure: The theory being that if advisors are required to disclose ties that may bias their recommendations, those relying on the advice will be able to make better decisions. Contrary to this rationale, new research suggests that disclosure can actually backfire by creating additional pressure on consumers to comply with their advisor’s recommendation.

 “People experience conflicting reactions to disclosure,” said Sunita Sah, lead author of the study and assistant professor of business ethics at Georgetown University’s McDonough School of Business. “Advisees who received disclosure were aware that the advice may be biased and trusted it less. Yet, they also were more likely to comply with their advisor’s recommendation and be less satisfied with their choice.”

The compliance pressure is due to advisees feeling obliged to help satisfy their advisor’s personal interests.

“It becomes apparent to advisees how they can help, or not help, their advisor,” Sah said. “And advisees feel more uncomfortable to reject the advisor’s recommendation, especially when the disclosure comes directly from the advisor. The disclosure became an implicit favor request.”

With her coauthors, George Loewenstein and Daylian Cain, Sah conducted six experiments in which participants faced real choices between two different die-roll lotteries. The participants received advice from advisors who had a conflict of interest that either was, or was not, disclosed. One die-roll was obviously superior for the advisees to choose but selecting the inferior die-roll lottery was better for the advisor – something advisees were only aware of when it was disclosed.

Of those advisees who received biased advice (that is, a recommendation to choose the inferior lottery), 53 percent complied with this recommendation without disclosure, but this number increased to 81 percent with disclosure. Advisees that received disclosure also reported that they trusted the advice less but felt significantly more pressure to help their advisor and more uncomfortable to turn down their advisor’s recommendation.

The compliance pressure from the disclosure is not motivated by altruism, but rather the reluctance to appear unwilling to help the advisor once the advisor’s interests are publicly disclosed. This “burden of disclosure” effect, however, can be reduced if disclosure is provided externally, via a third party, rather than from the advisor.

“Disclosure leads to social pressures to comply with advice even if trust in the advice is decreased,” Sah said.

As disclosure is likely to remain a major component of managing conflicts of interests, this research provides insights that could improve how disclosure is implemented. Other remedies that were effective in reducing the pressure to comply were allowing advisees to make the decision in private or providing a “cooling-off” period in which advisees could change their mind.

“People desire transparency and disclosure is not always bad,” Sah added. “However, disclosure can have unintended consequences and we need to explore and understand better when disclosure works well and when the costs of transparency may outweigh the benefits.”

The full study, “The Burden of Disclosure: Increased Compliance with Distrusted Advice,” was published by the Journal of Personality and Social Psychology.

Sunita Sah, M.D., M.B.A., Ph.D., is an Assistant Professor of Business Ethics at Georgetown University and a Research Fellow at the Ethics Center at Harvard University. Her research focuses on institutional corruption, business ethics, and advice—in particular, how professionals who give advice alter their behavior as a result of conflicts of interest and disclosure policies.