11 January 2010
Successful Intentions Newsletter
Hi ,
When is advice free of bias?
Probably never!
So what do you do when your doctor recommends an X-ray, and then says he has an interest in the X-ray facility? Or you find out that the company you want to buy shares in is getting consulting services from its auditor?
Would you go ahead and get the X-ray anyway? are the shares now worth half as much? Ten percent less?
Behavioural Economist George Lowenstein and his colleagues wanted to find out about the effects of bias on advice. They constructed an experiment where "investors" had to guess the value of a jar full of coins. To help them, Lowenstein provided paid advisers who had additional information about the value of the coins in the jar.
In some cases, the advisers were paid on the accuracy of the clients guesses: the more accurate, the bigger the advisers payday. But in other cases, the adviser was paid on how high the client's guess was. The higher the client's guess, the more money the adviser made.
As expected, this conflict of interest had the effect of raising the estimates given by the advisers. But when the advisers were paid based on how high their clients guessed and this conflict was disclosed to the client, their client's estimates were the highest of all.
Disclosure actually increased the bias in the client's "investment decisions". Why?
It's all to do with the moral-licensing effect. In laboratory experiments when people demonstrate they are not corrupt in some way, they are actually more likely to display exactly this corruption on subsequent tasks. As if they have a self-avowed license to behave that way. "Hey, I warned you!"
Disclosures of conflicts of interest function in much the same way. They tell people, "Hey, I warned you!" That's why disclosing a bias doesn't cancel its effects. And most of the time we don't know what to do with the extra information, so we ignore it.
The best way to solve this dilemma is eliminate the bias in the first place. In any case, the bottom line of Lowenstein's experiments was that when the conflict of interest was disclosed, the advisers made more money - and their customers made less.
What's the moral of the story, ? Whenever you seek advice don't let yourself be attracted by the big glossy advertisements. read the fine-print. In fact, read only the fine-print!
For reflections on how to see more clearly in 2010 check out on my "Wisdom Circle" blog for musings, research, and applications of practical wisdom!
Keep your intentions clear,
Peter Webb
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