On August 23, 1973, Jan-Erik Olsson decided to rob a bank. He wasn't a very good bank robber and botched the job. A convict already on parole, he held the four bank employees hostage for six days by placing them in the bank's vault. Olsson, later joined by his friend Clark Olofsson, tortured the captives by threatening them with dynamite and nooses.

When finally released, their detainees reacted in an unexpected fashion. Not only did they refuse to testify against their captors, they actually began raising money to defend these repeat offenders.

Today we call this the “Stockholm Syndrome,” named for the city where this bank robbery occurred. This event and the reaction of its victims tells you everything you need to know about the effectiveness of disclosure. Indeed, research had repeatedly shown disclosure is at the very least ineffective and at worst, enables further sub-optimal behavior.

Perhaps the best explanation for this is known as the “Panhandler Effect.” You may witness this when you see an unsuspecting passerby throw a coin into a tin cup of some vagrant asking for help “to buy breakfast.” You may also witness this when the person ahead of you in the copier line allows someone to cut in front of them simply because they asked. The Panhandler Effect occurs because we all feel pressure to give in when asked. Some people have the discipline to withstand this pressure. Most don't.

Disclosure has the unintended effect of triggering the Panhandler Effect at the same time it allows the prospect to “justify” conflicts-of-interest. After all, if a salesman goes through all the effects of disclosure and there's a chance he might be suggesting a product that is not in the best interests of the prospect, then it really can't be that bad, can it? This is the kind of twisted logic research in behavioral science shows people go through.

Worse, the salesman may feel, once the disclosure is made, he is under no further constraints. Disclosure allows him to offer the prospect anything, since he had fulfilled his obligation to tell the prospective “caveat emptor.”

Some feel the use of disclosure is part of a bigger system of fallacies. Called “The Chicago Theory of Regulation,” it implies regulation exists not to protect the consumer, but to protect the regulated (and the regulators). Disclosure represents an operational definition of this. Disclosure is easily measured. That means it's easy for regulators to see and it's easy for the regulated to provide it as evidence of compliance. Bam! They both get to mark off a box on their checklist.

The trouble here is, while disclosure satisfies the needs to the regulated and their regulators, it fails to help those who the regulators are charged to protect. Need proof of this? How many packs of cigarettes have been sold since the “Surgeon General's Warning” first appeared on every pack beginning in 1965?

Keep this in mind as all those “Best Interest Contract Exception” paragraphs begin popping up in financial agreements.

Instant Insights /

The irony of disclosure

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