Conflicts of Interest

A conflict of interest occurs when my personal interests diverge from my professional or moral responsibilities to others. If I have a fiduciary responsibility to act in the best interests of an organization, but I can benefit personally from my actions, then I have a conflict of interest. These situations are normally regarded as improper because of the damage they do to people and organizations and the unfairness they create.

Some conflicts are much more serious than others and result in feelings of moral outrage that call for reform. For example, most companies have a code of ethics that prohibits employees from having an ownership interest in subcontractors who do business with the company. Other conflicts are more subtle and may not even be recognized as anything more than customary business transactions, such as realtors helping clients buy more expensive homes and mechanics recommending the replacement of new parts on vehicles.

Although some conflicts of interest can be solved by eliminating them, the normal prescription for handling a conflict of interest is a policy of open disclosure. A popular proverb says that “Sunshine is the best disinfectant for deceit.” The rationale for disclosure is that by divulging a conflict of interest and making all financial relationships transparent those who are involved in the transaction will be warned about the possibility of biased information. This enables customers and clients to disregard or discount the information accordingly.

The effectiveness of disclosure has been questioned, however, by studies showing that disclosures do not work the way they are intended. If I have a conflict of interest and I tell you about it, you are supposed to discount my advice because it may be biased. Research shows, however, that rather than discounting what I say, you tend to have greater confidence in my advice. Thus, disclosure has the effect of harming the very people it is intended to protect. Consider the following scenario.

Karen felt pain in one of her bottom molars. When she visited a dentist he told her the following: “Your pain is caused by a cavity that has destroyed the nerve in that molar. Consequently, you need to have a root canal and a new cap on that tooth. If you look closely, you will also see that all of your bottom teeth are badly worn. This is a situation that will only get worse. You need to have caps put on eight of your bottom teeth and now is the right time to do it so that they will all be properly aligned. I’d be happy to work you into my schedule to get your teeth fixed as soon as possible. If you think you need a second opinion, I’d be happy to help you see another dentist.”

Research subjects (N=202) were asked to evaluate the persuasiveness of this message and indicate whether they thought there was a conflict of interest and whether they would obtain a second opinion. Half of the subjects read this entire message while the other half did not have the last sentence suggesting a second opinion. This last sentence was intended to draw attention to the dentist’s potential conflict of interest and one might expect that after reading it the subjects would be more skeptical about the dentist’s recommendation and want to seek a second opinion. The data indicated just the opposite, however. By suggesting that Karen obtain a second opinion, the subjects said that the message was significantly more persuasive and they were less inclined to obtain a second opinion.

Research has identified three valuable insights that help to explain these perverse results. The first is called moral licensing. Knowing that my conflict of interest has been disclosed appears to psychologically allow me to exaggerate and misrepresent without feeling a sense of guilt or shame. It is as though the burden of accuracy is removed from me and transferred to whomever uses my biased information.

The second psychological mechanism is the anchoring effect of biased information. My biased advice tends to create a mental starting point that you rely on even when you know my advice is biased. Being told that there is a conflict of interest does not seem to adequately remove the full effect of the bias since you do not know precisely how much discounting needs to occur.

Finally, a third psychological mechanism is the subtle reciprocation effect that occurs when I admit that I have a conflict of interest. When I admit that I have a conflict there is the subtle implication that “I’m being honest with you, therefore I expect you to be honest with me and trust what I say.” The consequence is that you are inclined to accept the biased advice and act on it even when you find our interpersonal relationship irritating.

Conflicts of interest are much more prevalent than most people recognize; many economic transactions and professional services are so common that the potential for a conflict of interest is overlooked. The ideal solution to a conflict of interest is to eliminate it when possible, such as recusing oneself from rendering a decision or donating one’s proceeds to a charity. The normal prescription of disclosure is not an adequate protection for some situations; disclosing a conflict of interest tends to create a reciprocity effect wherein people feel obliged to accept the advice. While disclosure may be the only solution for some situations, eliminating the conflict is the ideal. $

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