Self-deception enables financial advisors to make recommendations that benefit themselves at the expense of clients, suggests a new academic paper titled “Bribing the Self.”
“People find ways to justify making unethical choices without feeling bad about themselves,” Uri Gneezy, the Epstein/Atkinson Endowed Chair in Behavioral Economics at the University of California, San Diego's Rady School of Management, told RIA Intel.
The report, published this month by Gneezy, Silvia Saccardo (Carnegie Mellon), Marta Serra-Garcia (UCSD), and Roel van Veldhuizen (Lund University), states “We demonstrate how self-deception helps advisors be biased while preserving their self-image as ethical and identify limits to advisors’ ability to self-deceive.”
The authors conducted experiments on more than 2,000 people to measure self-deception, using Amazon Mechanical Turk, a crowdsourcing platform often used by academic researchers.
In the experiments, subjects were asked to recommend one of two investment options, A and B, to a client while receiving a commission that depends on their recommendation. The authors varied the timing at which the subjects learned about the incentive. In the first experiment, the subject was incentivized to recommend investment A, learning of the incentive before evaluating the options. In the second experiment, the subject learned about the incentive to recommend A only after evaluating the investment options. The control treatment offered no incentive to recommend A.
The upshot: subjects who learn about their incentive before evaluating the investments “are more likely to be biased than when they learn about the incentives only after privately evaluating the investments,” the study indicates. “Biased advice persists with minimal justifications but is eliminated when all justifications are removed.”
The report states that “given that financial advice is partially subjective, some advisors may be able to convince themselves that investment recommendations that benefit them financially are actually in the client’s best interest, thereby preserving their positive self-image.”
The capacity for self-deception isn’t unique to the advisory business, the authors argue.
According to the report, overtreatment for medical decisions accounts for $210 billion in wasteful annual spending, partly due to doctors who “recommend unnecessary procedures for which they are directly compensated.” The study cites as examples the increasing number of surgeries, “many of which have been shown to be unnecessary and even harmful,” recommended to treat back pain, as well as unneeded C-sections for birth delivery.
To reduce the potential for self-deception, the authors recommend that advisors limit exposure to incentives and evaluate investment options before learning about incentives when they exist. Lastly, the authors recommend that advisors gain “as much information about the client’s preferences as possible” to properly calibrate risk profiles.