In the interest of full disclosure

M.P. Dunleavey, writing in Saturday's New York Times, reminds us of a 2005 study authored at Carnegie Mellon by Daylian Cain--then a doctoral student in the Tepper School of Business--and Carnegie Mellon professors Don Moore and George Loewenstein which revealed that disclosures of conflicts of interest may not save clients from the malfeasance of their advisors. In fact, such disclosures may give advisors license to skew information in order to profit themselves.

The researchers conducted a study in which participants were divided into estimators and advisors. The estimators had to guess the amount of money in a jar that they had to glimpse from a distance. They would be paid money based on the accuracy of their estimates. The advisors, who observed the jars more closely, were divided into three groups. One group got paid based on the accuracy of their estimators' guesses, while the other two groups were paid according to how high the estimates were. Among those two groups, one was required to disclose this potential conflict to their "clients."

Well, as it turned out, the group that gave the most biased estimates were the advisors who had to disclose their conflict. While the clients slightly discounted the advice they received from the biased advisors, their guesses were still the worst among all the estimators. The results show that disclosing conflicts of interest may not be the curative for corporate collapses a la Enron that reformers had hoped, and that human beings are too quick to accept the judgment of experts, even when the experts in question have obvious incentives to deceive.

Jonathan Potts