Warnings are supposed to make us more cautious.
But sometimes they can do the opposite.
In a recent Globe and Mail column, I looked at research examining situations where warnings can actually increase attention to the behaviour they are meant to discourage.
The effect appears to be particularly relevant when the activity is rewarding and harmful outcomes are relatively rare.
Think about what happens after someone repeatedly ignores a warning and nothing bad happens.
They place another sports bet and win. They make a speculative trade and the stock goes up. They buy crypto despite being told it is risky and watch the price climb.
Eventually, their own experience starts competing with the warning.
The message says: Be careful.
Their experience says: What’s the problem?
Over time, the warning can become background noise.
This has important implications for investing because access to riskier and more complex products continues to expand while more people are investing without professional advice.
Private investments are an especially interesting example.
Unlike publicly traded stocks, private assets are not constantly repriced in the market. Their reported returns can therefore appear relatively smooth even when substantial risks exist.
Quarter after quarter of stable-looking performance can make a risk warning seem increasingly disconnected from reality, right up until something goes wrong.
That does not mean disclosures and warnings are useless.
But it does suggest we should be careful about expecting a generic pop-up or paragraph of legal language to protect investors on its own.
There may even be situations where a warning becomes a signal that something is exciting, sophisticated or normally reserved for wealthy investors.
Good investor protection requires more than telling people that something is risky.
It also requires thinking about how people actually interpret those warnings after months or years in which the warned-about consequences fail to materialize.
Preet Banerjee
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