Strategic Responses to Disclosure Information
One of the major themes of this blawg can be described as yet another example of the law of unexpected consequences. According to the economic theories which our consumer protection laws are built upon, a more knowledgeable consumer will be better protected from fraud. Thus, for purchasers of business opportunities, franchises, and more passive investment vehicles we have disclosure laws which reverse the ordinary common law of "buyer beware". Individuals who purchase these type of investment earnings opportunities are required by law to be provided with more information than the market would usually provide.
Yet, as I have consistently argued, with example after example, the underlying economic rationale does not work for the sale of business opportunities. Providing better information, seven or ten days before the actual purchase, which contradicts or conflicts with the purchaser's pre-disclosure evaluation of the company will at best be downgraded and ignored, and at worst, propel the individual into make exactly the wrong decision, faster and quicker.
One part of the solution to this problem is to require that the disclosure documents for franchises, business opportunities, and network marketing opportunities be made public so that individuals could review them prior to contacting the company or opportunity. The other part of the solution is to allow private individuals to prosecute violations of the FTC Rule.
Now, are there other situations in which disclosure, which is designed to remedy or balance the "buyer beware" motif of the marketplace, does not work?
In a very interesting article, titled "The Dirt on Coming Clean: The Perverse Effects of Disclosing Conflicts of Interest", Daylain M. Cain, George Lowenstein, and Don A. Moore, have designed an experiment which shows disclosing conflicts of interests can actually make the situation even worse. First, the individuals who get the disclosure tend not to discount their advisor's information enough - even thought they "know" that their advisor has a different agenda. Second, the advisor's who disclose their conflict of interest tend to give even more biased information, incorrectly believing that their advice might be severely discounted. The authors conclude that instead of disclosing the conflict of interest, the advisors should simply not be allowed to act in way which engages the conflict.
There is at least one court which agrees with authors, consider this example from tort law and bundled settlements. As described by Walter Olson at the pointoflaw blawg,
"A distinctive danger of "bundled" settlements, or "batch" or "inventory" settlements as I have called them on another occasion, is that plaintiff's lawyers may refuse to settle a relatively strong case unless a defendant also agrees to settle many relatively weak cases. In the batch settlement the defendant winds up paying more money, but since it also winds up spreading around that money among many claimants, the "strong" individual claimant (say, one with mesothelioma who worked closely with the defendant's product) may fare less well than if his case had been taken to settlement on its own.
At the same time, it would seem plausible that rightly employed, batch settlements can serve legitimate objectives of economy, finality and closure; some defendants might prefer or even instigate them, while conscientious plaintiff's lawyers might take care to manage the process so that no clients were shortchanged. Perhaps the Michigan court's action reflects a prudential estimation that in the asbestos case, these potential advantages are outweighed by the risks of abuse."(my emphasis)
Hopefully this is just the beginning of more experimental evidence about just what we can reasonably expect from a consumer protection disclosure regime, in contrast to what the rational expectation theorists would tell us.
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