Indexfundfan\’s blog (new URL is Indextown.com)

April 8, 2006

Disclosure of conflict of interest

Filed under: Finance — indexfundfan @ 7:34 pm

When the client is ill-informed about certain products, does disclosure of conflict of interest by the advisor help? This paper, in the Journal of Legal Studies, has an interesting viewpoint, arguing that disclosure can have perverse effects instead. I think this is because the disclosure lulls the clients into thinking that they are in good hands and reduce their guard as a result.

The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest

Abstract: Conflicts of interest can lead experts to give biased advice. While disclosure has been proposed as a potential solution to this, we show that disclosure can have perverse effects, and might even increase bias. Disclosure may increase bias because advisors feel morally licensed and strategically encouraged to exaggerate their advice even further from the truth. As for those receiving the advice, proper use of the disclosure depends on understanding how the conflict of interest biased the advice and how that advice impacted them. Because people lack this understanding, disclosure can fail to solve the problems created by conflicts of interest.

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