Most innovation is about adding something new to existing products, but one of the most interesting and important innovations of our time is the elimination of something – the elimination of conflicts of interests.
Conflicts of interest are often inherent in the business models of companies and service providers, but now some companies are deliberately setting themselves up in a way that avoids them entirely.
To understand why this is important we need to think back to the 2007–2008 financial crisis, where conflicts of interest played a toxic role. A reduction of financial regulations created a system where bankers could make tremendous amounts of money by seeing the world only in a way that was profitable for them. They could convince themselves, for example, that mortgage-backed securities were a good idea and then persuade others to buy them. There was no requirement on them to consider the interests of others when they conflicted with their own goals. The result we all, painfully, know.
It is not always easy to recognise conflicts of interest, especially in ourselves. But we are all subject to them. Every football fan knows that when the referee makes a decision against their team, they are a blind idiot; our loyalty to our team prevents us from seeing the play objectively. But, when we watch a football match, we understand that we are not being truly objective. Financial institutions are no different in terms of their inherent conflicts of interest, but sadly they don’t see these conflicts with the same clarity as we see the conflicts of interest in sports.
The good news is that some startups are realising how corrosive conflicts of interest are. And they are creating new business models that remove conflicts of interest and therefore earn the trust of consumers.
An example of this, with which I am involved, is Lemonade, an insurance provider. In the standard insurance model, consumers pay fees and, when something bad happens, they file a claim. The problem is that in this model, an insurance company benefits financially when it refuses to pay out, creating a conflict of interest in its staff between the needs of consumers and the need for the company to make a profit. This is a tremendous conflict and some staff are likely to misbehave.
Lemonade, on the other hand, is not set up as a two-sided game between the consumer and company. Instead, we have made it a game with three players: the consumer, the insurance company and a charity that the consumer chooses. The consumer makes their payments. Lemonade keeps a fixed percentage, say 20 per cent, and pays claims from the remaining 80 per cent. Any money left over at the end of the year goes to the charity. Under this system, Lemonade makes the same profit whether it pays claims or not. And, if a consumer decides to inflate their claim, they are taking money from the charity they have nominated.
The shift here is a move from a system where companies simply ask customers to trust them, to a system where companies deliberately set up their business model in order to create trust.
In 2019, I believe we will see more companies using this approach and more consumers rewarding them for it. We are every day becoming more weary of the conflicts of interest and dishonesty that plagues so much of business and soon we will start choosing companies that have systems in place to avoid them.
Dan Ariely is James B Duke professor of psychology and behavioural economics at Duke University
This article was originally published by WIRED UK
