The Hindu Business Line : Disclosure

CONSIDER this. You hire a professional money manager, who asks you to buy ITC. She also tells you that she personally holds some shares in the company. There is a conflict of interest. What if she is trying to create more demand for the stock? After all, an increase in demand will push up the stock price, thereby improving her investment value. Will the disclosure help you in taking an informed decision?

A research paper authored by professors at the Carnegie Mellon University concludes that we may not always benefit from such disclosure. Why?

Suppose your friend is diagnosed with a rare intestinal problem. The doctor says that the medication is costly but necessary. He tells you that the company that manufactures the medicine has funded his research project. The authors argue that when the doctor makes a disclosure, there is a possibility that he may exaggerate the severity of the problem. The doctor may state that an immediate medication is necessary to prevent further damage to the intestine.Why? Exaggerating the situation may neutralise the negative bias that the disclosure has created in the recipient's mind. The thought might pass your friend's mind that the doctor may be employing this tactic to sell the company's medicine. But would your friend want to risk not taking the medicine? That could damage his intestine if the doctor were indeed telling the truth.

Research shows that we find it difficult to understand how conflict of interest translates into biased advice.

So, how useful is a disclosure? It can be useful if we can judge whether the person making the disclosure is one with professional integrity.

(The author is Head, Research, at Navia Markets)

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