Advisors Give More Biased Advice When They Are Advising Large Numbers of People

What’s easier, giving unbiased advice to a group or an individual? My colleague, George Loewenstein at Carnegie Mellon, and I have research showing that the answer is the latter. When advice affects a larger number of people, if anything, greater care should be taken to ensure its accuracy. Yet, contrary to this logic, we found that advisors confronting a financial conflict of interest give more biased advice to multiple, anonymous recipients than to single, identifiable recipients.

The process appears to be driven by increased intensity of feelings toward individuals; advisors have greater sympathy for and more motivation to reduce bias in their recommendations to identifiable individuals.

We came to this conclusion by having people look at a small part of a grid that was covered with filled and unfilled dots. These people (the advisees) needed to estimate how many filled dots there were on the whole grid. They were given advice from another set of participants, our “advisors,” who could see all 900 dots. The advisees were rewarded if they guessed the number of filled dots accurately, while the advisors sometimes had a conflict of interest and were getting paid more if the advisees overestimated. The advisors with a conflict tended to give biased advice, of course, but, consistent with research on the ‘identifiable victim effect,’ their advice turned out to be much less biased if they were giving it to just one advisee that they knew something about (such as their name and age) than if it was for a group of five advisees or a person they knew nothing about.

This research can shed light on the behavior of stock analysts who gave recommendations they themselves didn’t believe during the dot-com boom, that of auditors during the Enron debacle, and of bond raters during the housing market bubble. In all of these cases, these advisors were giving biased advice to large numbers of investors who were anonymous to them, so the damage they were causing had little reality for them.

When advice affects the welfare of a greater number of people, greater attention and care should be taken to ensure its accuracy. However, many advisors face conflicts of interest and next time you need advice on a particular stock, don’t read the public recommendations but speak to your advisor one-on-one.

Sunita Sah conducted this study as a researcher for Duke University’s Fuqua School of Business. You can read the full report to this research in the May issue of Social Psychological and Personality Science. Dr. Sah is an incoming Assistant Professor of Business Ethics at Georgetown University.