Christopher Tarver Robertson, Biased Advice

• Publication year: 2011

BIASED ADVICE

Christopher Tarver Robertson^*

ABSTRACT

The modern capitalist society, characterized by decentralized decision making and increasingly sophisticated products and services, turns on relationships of epistemic reliance, where laypersons depend upon advisors to guide their most important decisions. Yet many of those advisors lack real expertise and many are biased by conflicting interests. In such situations, laypersons are likely to make suboptimal decisions that sometimes aggregate into systematic failures, from soaring health care costs to market crashes. Regulators can attempt to manage the symptoms and worst abuses, but the fundamental problem of biased advice will remain. There are many potential policy solutions to the fundamental problem, from outright bans on conflicting interests to disclosure mandates, yet their comparative effectiveness is poorly understood.

By constructing a decision task for human subjects and providing advice in various scenarios, this Article reports new field experiments testing alternative policy mechanisms. Prior research has shown that disclosure mandates can be deleterious if they make advisors more biased, but this paper contextualizes those findings. It turns out that disclosures may be valuable in settings where relative expertise is low, but deleterious where relative expertise is high. By also disaggregating the data, one finds that disclosures of conflicting interests may hurt laypersons in the majority of situations where the conflicted advice is not actually biased. Thus, the evidence suggests that, if they are to be at all effective, disclosure mandates should be narrowly tailored.

Most importantly, the evidence shows that a disclosure mandate improves layperson performance when unbiased advisors are also available. Yet laypersons appear to be poor judges of their need for unbiased advice, so market mechanisms may be ineffective for provisioning unbiased advice. In the end, the presence of an unbiased advisor is the strongest determinant of layperson performance, and thus policymakers must develop ways of aligning the interests of advisors and laypersons. Pay-for-performance, blinding of experts, and mandatory or subsidized second-opinion policies are likely to be helpful in aligning these interests.

INTRODUCTION .............................................................................................. 655

A. The Problem ............................................................................... 655

B. Potential Policy Solutions .......................................................... 659

I. HOW A MANDATORY DISCLOSURE POLICY CAN HURT

LAYPERSONS BY DEGRADING THE ADVICE GIVEN ............................. 666

A. The Cain, Loewenstein, and Moore Study (CLM) ...................... 666

B. The Present Experiment's Replication and Extension of CLM .. 668

II. WHEN A DISCLOSURE, OR EVEN A BAN, MIGHT WORK, DEPENDING ON RELATIVE EXPERTISE AND DEGREE OF BIAS ............ 670

A. Measuring Epistemic Asymmetry and Bias ................................ 670

B. Extrapolating to Real World Conditions to Test Policy

Solutions ..................................................................................... 673

III. MAKING DISCLOSURES WORK BETTER THROUGH ANCHORING, INFORMATION TECHNOLOGY, AND PERSONALIZATION ...................... 677

A. When to Disclose ........................................................................ 678

B. What to Disclose ......................................................................... 679

C. To Whom to Disclose .................................................................. 683

IV. CALIBRATING RELIANCE IN A MARKET FOR ADVICE ......................... 686

A. Affirmative Disclosures of Aligned Interests .............................. 686

B. Using Disclosures to Select Advisors ......................................... 688

C. The Value of Second Opinions ................................................... 690

D. A Market for Unbiased Advice ................................................... 691

CONCLUSIONS-ELIMINATING BIASES WITH SOUND POLICY ....................... 696

METHODOLOGICAL APPENDIX ....................................................................... 698

INTRODUCTION

A. The Problem

Atul Gawande recently illustrated the economics of the practice of medicine in America by profiling one area-McAllen, Texas-which leads the nation in the problem of increasing health care costs without observable increases in quality:

General surgeons are often asked to see patients with pain from gallstones. If there aren't any complications-and there usually aren't-the pain goes away on its own or with pain medication.

. . . A surgeon has to provide reassurance (people are often scared and want to go straight to surgery), some education about gallstone disease and diet, perhaps a prescription for pain; in a few weeks, the surgeon might follow up. But increasingly, I was told, McAllen surgeons simply operate. The patient wasn't going to moderate her diet, they tell themselves. The pain was just going to come back. And by operating they happen to make an extra seven hundred dollars.¹

This vignette depicts a situation of epistemic reliance.²The surgeon has a much better ability to determine how best to treat gallbladder pain compared to the patient, a layperson untrained in medicine, and the patient thus reasonably relies upon the surgeon for advice. This vignette also depicts conflicting interests, where the surgeon is in part motivated (perhaps only subconsciously) by the prospect of receiving payment for the service of surgery, while the patient instead seeks health and, all other things being equal, prefers to avoid the expenses, pain, inconvenience, and risks of needless surgery. Whether these conflicting interests cause surgeons to make different recommendations than they would otherwise make, i.e., whether the conflicts cause biases, is an empirical question.³

These sorts of situations, where informational asymmetry exists between doctor and patient, and their motivations are out of sync, can be found throughout medicine. As one recent report explained the general problem:

[C]onsumers . . . face a huge knowledge gap compared with care providers and are therefore highly reliant-and understandably so- on the advice and guidance of their physicians. In the absence of evidence to the contrary, patients may often assume that more care, or more expensive care, will lead to better outcomes.

. . . [Meanwhile, f]ee-for-service reimbursement, the primary method of payment for outpatient care, . . . creates financial incentives [for physicians] to provide more care, and care that is more costly. More visits, more tests, more procedures all add up to more pay for providers and higher costs to the system.⁴

In the aggregate, as laypersons' choices are systematically skewed by such biased advice, the problem creates massive externalities and systematic failures. While serving as the director of the Congressional Budget Office, Peter Orszag argued that "our country's financial health will in fact be determined primarily by the growth rate of per capita health care costs," and he pointed at fee-for-service incentives as a primary cause.⁵The health care industry is characterized by radically distributed decision making, with each patient deciding upon her own course of treatment within the range of treatments offered by providers and covered by public and private insurers. Thus, real reform of health care costs may need to focus on fixing the relationship of epistemic reliance and the conflicting interests at the bottom levels of the health care economy, since that is where the decisions are made.

For another example of this problem of epistemic reliance and bias, consider the wave of home mortgage foreclosures that contributed to the "Great Recession." In the wake of the mortgage-lending debacle, which rocked global financial markets and caused policymakers to make unprecedented interventions in the financial industry, the Federal Deposit Insurance Corporation took a hard look at the subprime lending products and practices of the mortgage industry.⁶Were too many loans being made to unqualified borrowers? Were the exotic mortgage products destined to fail?

The financial industry executives demurred about their practices and products, pointing instead toward the decentralized decisions made by every homebuyer taking out a mortgage and every homeowner considering a refinance.⁷The executives said, "You know, it's kind of like the N.R.A.-people kill people, not guns! It's not the mortgages, it's the borrowers."⁸

There is some truth in that demurrer. Notwithstanding all the regulations at the margins, a mortgage agreement is ultimately a contract, founded on the idea of voluntarily chosen promises.⁹Borrowers can bind themselves for decades to whatever financial products the banks want to offer them, and if the borrowers make bad decisions, then they suffer the consequences, along with the banks that made the bad bets when they issued the mortgages to those borrowers.

The borrower-centric analysis ignores the reality of epistemic reliance and conflicting interests, which underlie these transactions. Borrowers have little ability to interpret voluminous and technical loan documents. Nor can they compare the real costs of the various contractual terms or use actuarial data to weigh the likelihood of defaulting, given various economic scenarios over the next few decades. As Elizabeth Warren explains,

The effective deregulation of interest rates, coupled with innovations in credit charges (e.g., teaser rates, negative amortization, increased use of fees, cross-default clauses, penalty interest rates, and two-cycle billing), have turned ordinary credit transactions into devilishly complex financial undertakings. Aggressive marketing, almost nonexistent in the 1970s, compounds the difficulty, shaping consumer demand in unexpected and costly directions...