Disclosures About Disclosures: Can Conflict of Interest Warnings be Made More Effective?

• Published date: 01 June 2015
• DOI: http://doi.org/10.1111/jels.12071
• Date: 01 June 2015
• Author: Ahmed E. Taha,John V. Petrocelli

Disclosures About Disclosures: Can

Conflict of Interest Warnings be Made

More Effective?

Ahmed E. Taha and John V. Petrocelli*

People regularly rely on advisors who have conflicts of interest. The law often requires

advisors to disclose these conflicts. Despite these disclosures, people generally insufficiently

discount conflicted advice. This might be partly due to people interpreting the very fact that

the advisor is disclosing a conflict of interest as a sign that the advisor is trustworthy,

undermining the purpose and effectiveness of the disclosure. This article presents the results

of an experiment indicating that requiring advisors to also disclose that they are legally

required to disclose their conflict of interest makes people discount their advice more. This

occurs, at least in part, because such advisors are viewed as less trustworthy than advisors who

merely disclose their conflict of interest without also stating that the disclosure is legally

required.

I. Introduction

People regularly rely on advisors who have conflicts of interest. The most common policy

approach to this problem is to require the advisors to disclose these conflicts. Despite these

disclosures, however, advisees still insufficiently discount advice given by advisors with

conflicts of interest. Thus it is important to determine if the disclosures can be made more

effective.

Much of the rationale behind these disclosure requirements is that disclosure of the

advisor’s conflict will make advisees more skeptical of the advice. However, the very act of

disclosure might be interpreted by some advisees as an act of honesty. In other words, they

might view the fact that the advisor is disclosing the conflict of interest as evidence that

the advisor is trustworthy. This could undermine the purpose and effectiveness of the

disclosure.

This article presents a controlled experiment investigating whether requiring man-

dated disclosures of conflicts of interest to also state that the disclosures are legally required

*Address correspondence to Ahmed Taha, Pepperdine University School of Law, 24255 Pacific Coast Hwy., Malibu,

CA 90263; e-mail: ahmed.taha@pepperdine.edu. Taha is Professor of Law, Pepperdine University; Petrocelli is

Associate Professor of Psychology, Wake Forest University.

For helpful comments and suggestions, the authors thank Robert Anderson, Omri Ben-Shahar, Jonathan Cardi,

Michael Green, Mark Hall, Molly Mercer, Gregory Parks, Matthew Phillips, Mark Scarberry, Sunita Sah, Ronald

Wright, and the anonymous referees. The authors are also grateful to Lindsey Chessum and Alex Rothschild for

excellent research assistance.

bs_bs_banner

Journal of Empirical Legal Studies

Volume 12, Issue 2, 236–251, June 2015

236

would make them more effective. It tests whether this information would make people less

likely to attribute the disclosure to the advisor’s trustworthiness, and thus less trusting of the

advisor.

Participants in the experiment read a version of an email from an independent

insurance agent (the advisor) discussing two identical auto insurance policies, each from a

different insurance company. In the email, the agent recommended one of the policies,

allegedly because that insurance company provides better customer service. Versions of the

agent’s email differed in whether they also disclosed that the insurance agent receives a

higher commission on the recommended policy, and in whether they stated that this

disclosure was required by law. After reading the email, participants stated which policy they

would be more likely to buy, the strength of their preference, and how trustworthy they

consider the agent.

Consistent with prior studies, we find evidence that advisees discount advisors’ advice

if the advisors disclose their conflicts of interest. In addition, however, we find that advisees

discount the advice even more if the disclosure also states that the disclosure is required by

law. This greater discounting appears to occur, at least in part, because advisors who

disclose that the disclosure is legally required are perceived as less trustworthy. This suggests

that requiring conflict of interest disclosures to also state that the disclosures are legally

required will make the disclosures less likely to be perceived as acts of trustworthiness, thus

making the disclosures more effective.

The next two sections of this article present brief background information. Section II

discusses why advisees generally insufficiently account for bias created by advisors’ conflicts

of interest, even when the conflicts are disclosed. Section III explains why requiring advisors

to state also that mandated disclosures of the conflicts are legally required might be more

effective. Section IV presents the experiment that we used to test the effect of mandating

that advisors inform advisees that a disclosure of a conflict of interest is legally required.

Section V discusses the experiment’s findings and their implications for laws requiring

disclosure of conflicts of interest.

II. People Insufficiently Discount Advice for Conflicts

of Interest

A conflict of interest exists when a person’s self-interest conflicts with his or her professional

obligations. Advisors’ conflicts of interest can skew the advice they give, possibly harming

those who naively follow the advice. For example, substantial evidence exists that sell-side

securities analysts who work for companies that also provide investment banking services

give overly optimistic recommendations of particular companies’ stock to help secure

investment banking business from those companies (see Fisch 2007). Similarly, medical

researchers with financial relationships with pharmaceutical companies are more likely to

report research results favorable to those companies than are other medical researchers

(Angell 2000; DeAngelis 2011).

The most common policy approach to conflicts of interest is to require their disclo-

sure (Cain et al. 2011). Disclosure’s popularity stems in part from its being less intrusive

Disclosures About Disclosures 237