Why Disclosure Doesn’t Work

By PON Staffon / Conflict Resolution, Daily

Adapted from “Negotiating with Your Advisers,” first published in the Negotiation newsletter.

Our most trusted advisers face conflicts of interest between what is best for them and what is best for us. An attorney might give different advice about whether to settle a lawsuit depending on whether she would be paid by the hour or receive a percentage of the settlement. When doctors are differentially compensated for different procedures, their decisions about how to treat their patients are compromised. And financial advisers face a conflict of interest when their pay is based on their clients’ monetary decisions.

Whenever two or more parties with differing interests make decisions together, they are negotiating. How do you negotiate between your interests and those of your adviser?

A key aspect regarding conflicts of interest is that we can spot them when they involve others, but typically think we’re immune to them ourselves—whether we’re giving or receiving the advice. People also tend to believe that awareness of the issue solves the problem. For this reason, disclosure is a commonly used “solution” to conflicts of interest.

Daylian M. Cain, George F. Loewenstein, and Don A. Moore of Carnegie Mellon University provide fascinating recent evidence that disclosure does not eliminate professionals’ conflicts of interest, and, in fact, it may only make matters worse. They find that disclosure leads advisers to be even more biased by seeming to absolve them from paying attention to their advisees’ interests.

Conflicts of interest are typically psychological rather than strategic. Rather than consciously attempting to take advantage of his client, an adviser believes that his preference is aligned with his client’s best interest. Once an adviser has a set of incentives that differ from those of his client, he may simply be incapable of objectivity.

Cain and his colleagues urge you to view these interactions as negotiations in which you must eliminate any conflicts of interest between you and your advisers.