If you take all the results of cheating I described to you up to now, the real
fundamental issue here is conflict of interest.
What happens when we are paid to do things that are slightly different from the
truth? Do we see the world in a different way?
Are we biased and do we act on our bias? And the answer of course is yes.
Now the truth is that we all understand conflicts of interest.
We all understand that if we go to basketball game, and we are big fanatic
fans of team one, and the referee calls a call against our team, we will think the
referee is evil, vicious, blind stupid. And we all understand that in sports,
conflicts of interest are everywhere and you know what, maybe even makes the game
more fun. But ask yourself, would you go in front of
a judge if you knew the judge was getting paid 5% of the verdict that they would
pass? Probably nobody would take it on.
But never the less we have tremendous conflicts of interest.
We have conflicts of interest with our mechanics and our lawyers and our
accountants and of course our governments. And of course in the financial industry,
both financial advisers and bankers, have tremendous conflicts of interest.
And the question is how do we let it be? If we understand that people are blinded
by the conflicts of interest, shouldn't we do more to eliminate some of those?
Well, of course, people do understand that to some degree that conflicts of interest
are important or trying to eliminate it. But most of the efforts toward elimination
has been done on what is called sunshine policies and disclosure.
I idea is that if I'm your banker and I have a conflict of interest I should just
tell you about it, I should just put it on the website.
And the moment you know that I have a conflict of interest, you will know how to
discount my opinion. So that was a very nice experiment on
this. Imagine two people.
One is the adviser and one is the advisee. And the adviser sees a jar with money from
close up, and the advisee sees the same jar but from far away.
So the advisor has better information about what's in the jar, how much money,
than, than the advisee. Now in one case there was no conflict of
interest. The advisor was giving the advisee a piece
of information suggesting what they do. The advisee guessed.
And if the, the closest the advisee was to the real value, they both got paid more
money. Another condition there was a conflict of
interest. All of a sudden the adviser got paid more
as the advisee overestimated the amount. If they underestimated they got nothing,
but the more they over-estimated the amount they got paid.
What happened now? The adviser acted on the conflicts of
interest, they recommended the higher number and indeed the advisor made more
money and the advisee made less money. But here's the interesting thing.
What would happen if we added the sunshine policy?
What would happen if we added the disclosure?
Now the adviser, had to tell them, by the way, just so you know, I get paid more
money if you exaggerate the amount. What would happen?
What we usually think about, is that the moment the adviser will disclose, the
advisee will discount their opinion, maybe discount it by 10% by 15%.
But what could also happen is the advisor, knowing that their advice will be
discounted, will exaggerate their advice even more.
And now the question is, which one of those forces will be higher?
Will the advisor exaggerate more, or will the advisee discount more?
And the results show that the advisor, indeed, exaggerated more and the advisee
discounted not enough. So when the advisor was disclosing,
actually the advisor got more money and the advisee got less money.
So conflicts of interest are everywhere. They're important, they're big, they're
fundamental, they change people's view of the world, in, in important ways and get-,
cause them to give biased advice and behave in dishonest ways.
And sunshine policies and disclosure don't seem to fix the problem.
Now on to a couple of my own personal stories about, eh, conflicts of interest.
So I was burned, many years ago, and I spent a long time in hospital.
And about six years after I left hospital already, maybe not six, maybe five years
after I left hospital. I came back to the burn department and the
head of the department finds me and said, Dan, I have a fantastic new treatment for
you, come with me. It's not something you hear too often.
I will go with him to his office, and he says look, my right side of my face is
burnt. The left side of my face is not, so when I
shave, I have little black dots on the left side of my face, but on the right
side of my face, there's no black dots because I was burned.
What was his solution? He was going to tattoo little black dots
on the right side of my face as well. So he said, why don't you go home, shave
as close as you want to, and come back, and I'll do the tattooing?
I went home, I shaved. I, I shaved kind of carefully, because I
said, whatever I shave today, I have to shave for the rest of my life.
I went back to his office, and I said, you know what, can I see some pictures of this
procedure, you've done it on other people. He said yes, we've done it on two people.
Here are the picture, but I can't show you the whole face, I'll show you just the
cheek. You know, and sure enough these were cheek
with little dots. And then I said, what happens when I grow
older? What happens when I grow older and my hair
becomes white? He said, oh, don't worry about it, we can
laser it out when the time comes. I said you know what, I, I don't feel so
comfortable with it, let, let me not do it for now.
Maybe I'll come back next month or so, but for now, I don't want to do it.
And the next part was something I completely didn't expect.
He said Dan, what's wrong with you? Don't you want to be symmetrical?
Do you get some distorted pleasure from looking different?
He said do women feel sorry for you because you look so odd, and give you
sympathy sex, which, by the way, never happened.
But he gave me this tremendous guilt trip. Now I'm Jewish, I'm used to guilt trip,
but this was really extreme and he was also my physician for three years in
hospital, and he was a fantastic physician.
By the way he did this little eyebrow here, this eyebrow took him nine hours of
operations. He took,, two blood vessels that were
going up my skull and isolated a piece of skin here and took them with their blood
vessels, and redirected them. So because if you don't have the blood
vessel there's a good chance the skin will not function as well.
So this was, you know, the guy basically spent nine hours in the operating room
fixing half of my eyebrow. He clearly cared a lot about aesthetics.
He also cared a lot about me. Anyway but this guilt trip was not
something I was used to. So anyway I left him, quite shocked, then
I went to his deputy and I said what was going on?
Well, he told me, they did it on two patients already and they're looking for
third patient for an academic paper. And I was kind of an ideal patient.
Half the face burned, half not, its kind of symmetrical around here or
non-symmetrical if you want. And this made it made me very, good
candidate for his, for his paper. Now, he was a fantastic dedicated
physician, he spent amazing amount of hours with me, he cared a lot about me, I
knew him very well, but never the less at that moment, he was blinded.
He thought that there was something that was in his best interest was also in mind.
And I think this actually happens to all of us.
When we are so engrossed in what's good for us, then we feel more comfortable
demanding it from other people, not realizing how the conflicts of interest is
working on us. Of course there are also cases when I have
my own conflicts of interest. In one example, I ran an experiment at
Harvard. An the people at Harvard are very nice to
let me use their lab from time to time, and when I use this lab on that particular
occasion, we ran an experiment, and we hoped that one group will have the high
mean, and one group will have a low mean. And we basically got that, aside from the
fact that there was one person in the group I was hoping to be the highest, that
had the lowest possible result you can imagine.
And he pushed the mean and changed the variance, it was awful.
So I looked carefully in this one annoying participant.
And he was almost 25 years older than anybody else in this sample.
And I remember, there was one older gentleman who came to the experiment
drunk. The lab at Harvard is just by the street.
People come from the street. And, this guy, drunk came to the
experiment. Take him out.
Who wants drunk people in the study? Of course, lets kick him out.
What happened? Boom.
We kick him out, the results look beautiful.
But two days later in our lab meeting, we thought about this case.
And we said what would happen if by luck, this one drunk individual would not have
been in that group. He would have been in the other group, the
group we expected to have a low mean. Now, he would push the mean in the
direction we hoped it would go, even lower.
Would we even notice him in that case? And the answer was probably no.
The result would have looked just beautiful.
We wouldn't have taken him out. And even if we notice him, and we notice
he was the lowest, and we notice that he was drunk.
Now he would help our results. Would we take him out?
Probably not. Maybe we'd even imagine, ooh, this is
good, let's start having more drunk people in our sample.
And the issue here, and what I realize, is that I was my worst enemy.
When I was originally taking his data point out, I thought I was helping science
along. I was thinking that this is the real
pattern of the data, and I was eliminating something in order to get the real, eh,
reality to shine through. I was clearing up the path, but the
reality is, that's not what I was doing. I had an idea of what the data was look
like. Should look like and I use my creativity
to basically find an excuse, a rationalization of what the, why this
thing that was bothering me should get, should get out of the way.
I might have been able to find all kinds of other rationalizations.
Maybe if it was a different age, or ethnicity, or something else I could have
found the reason as well. So the point is that when we come to
conflicts of interest, it is basically to protect us against ourselves.
That we ourselves are likely not to see reality correctly, and we need to protect
ourselves. And now I have very strict rules, and I
tell my students that we have very strict rules.
It's okay not to have drunk people in the study, but you can only do it before the
study, you can't announce it afterward, especially not after looking at the data.
It is okay to say we don't want people who don't understand the instructions, but you
can only do it in front, up, up front and not, and not later.
And these rules are good for us to protect against ourselves, and without them, we
would do very badly. So what does it tell us about conflicts of
interest more, more generally? It tells us that conflicts of interest are
basically operating within this fudge factor.
Every time there's a grey zone, of what exactly is okay and not okay, conflicts of
interest are going to push us into the direction of what is good for us
financially. Good for our company, good for our friends
financially, and the worst thing of it is that we don't notice it ourselves.
There's lot of biases in decision making. And one of the interesting in the biases
is the one that we don't notice that exist in ourselves.
And conflicts of interest is one of those. It works on us, it changes our view, it
changes our view fundamentally, but we don't notice.
It's because somebody else is paying us for this.
And I'll just end by telling you one last experiment.
Imagine you come to a lab and we show you some art.
Some comes from gallery, that it is called Lone Wolf, and some come from a gallery
called Blue Moon. But I tell you one of those galleries,
let's say Lone Wolf, is the one that is giving you the $100 to pay for your
participation in this study, right now. And I put you in a FMRI scanner, so your
brain is being scanned, and I show you these images.
And you have to tell me how much you like them.
The first thing that happen, is that when you look at the results people like more
the art that came from their sponsored galleries.
And you can say, well, maybe people are just nice.
They say oh, this is nice gallery, they gave me some money for the experiment,
I'll repay them by saying I like their gallery, their, their art more.
But what was more interesting, is that the reaction of the brain in the pleasure
centers, also reacted more strongly to the supporting gallery.
And that amount of response the supporting gallery grew, as the gallery gave the
individual more money. And I think this is really what's
happening in conflicts of interest. We feel indebted to somebody, to
something, to some cause, to some goal or to our own pocket.
And it changes dramatically how our brains operate, how we view information.
And because of that, we really need to fix it.
If you understand conflicts of interest, you would be very disappointed with what
we've done with the financial crisis. I think the financial crisis is, basically
was a problem of conflicts of interest. Imagine I offered you $5 million a year to
view mortgage backed securities as a better product.
Don't you think you would be able to do it?
And I don't mean that you would lie. That you would say, oh I know these are
shitty products, but I'll tell my client that they are good.
Don't you think that with so much money on the line, your own opinion would be
shaded? And what would happen if they were harder
to evaluate, if they were complex? If you were sitting there with a big excel
spreadsheet and there's all parameters and estimation and at the bottom here you
would see the value of the mortgage backed security, but it will also reflect on your
bonus. Don't you think you would play with the
numbers a little bit better? Multiple steps removed from money to get
that number to be higher. And what if everybody around you believed
the same thing? Everybody believed that mortgage backed
securities are wonderful. And what if you're creative individual?
All of those forces would keep on shading your opinion.
Getting you to believe to a higher and higher degree, that these things are
actually better than they really are. And from that perspective we haven't
really done anything to the financial industry.
If you think that the villain in this whole story are conflicts of interest and
biased payments, then we haven't really done anything useful.
And I think it's the same for the financial industry.
It's the same for the health care industry, and of course the same thing for
Washington, in terms of lobbyists. And until we recognize how big force,
conflicts of interest are, how paying you a hundred dollars from one gallery, or
giving you a favor from somebody else, or paying you a higher bonus under some
conditions: All of those color our own understanding to a deep level.
And until we recognize the size of conflicts of interest, the depth of the
influence, and try to create systems that don't have as much conflicts of interest,
we're not going to get out of those troubles.
So it's not going to be easy, eliminating conflicts of interest is hard, but I think
we must look at ourselves carefully and try to eliminate as many of them as
possible.