Giveaways, gifts, freebies, premiums, promos, tchotchkes, swag. Every year around this time, it pours in: the pens with corporate logos, the canisters of flavored popcorn, the iTunes gift cards, the boxes of chocolate, the pocket calendars, the shipments of fresh fruit.

It’s the annual ritual in which financial companies say “thank you” to the people on the other side of their trades, to clients, to journalists.

No one seems to be bothered very much by the exchange of small gifts.

But you should be. There is overwhelming evidence that small gifts have a big influence on the behavior of the recipients.

A new study from a leading behavioral economist, Ulrike Malmendier of the University of California, Berkeley, finds that “small gifts may [create] a stronger reciprocal effect than large gifts,” making the recipients feel even more indebted to the giver. “Thus, not only might size limits be ineffective in reducing the influence of gift giving…they may even be counterproductive.” Numerous studies among doctors have come to the same conclusion.

What makes small gifts potentially more corrupting than large ones?

If you believe that your integrity isn’t for sale, you certainly won’t believe anyone can buy it for a low price. As H.L. Mencken said, “The essence of a genuine professional man is that he cannot be bought.”

So you aren’t likely to think there’s anything wrong with accepting gifts if they are mere trifles.

That opens the door for the giver to offer you still more gifts in the future. Even if they, too, are small, they can push you inch by inch and year by year down the slippery slope of obligation and special treatment.

Constant visual reminders – logos, colors, brand names – also make a company and its products more familiar to you and thus more favorable in your eyes. That happens whether you are aware of it or not, creating an unconscious bias that you can’t combat–because you aren’t even aware your judgment has been tainted.

Other research has found that the more gifts people receive, the less likely they are to believe that there’s anything wrong with receiving gifts–thus desensitizing them to the risk of becoming beholden to the giver.

Few people have expressed this creeping co-optation better than University of Southern California law professor George Lefcoe, recalling his service on a regional planning commission:

My first Christmas as commissioner – when I received the ham – I tried to return it at once, though for the record, I did not, since no one at Forest Lawn seemed authorized to accept hams, apparently not even for burial.  My guess is that no one of the many public servants who received the ham ever had tried to return it.

When I received another ham the next Christmas, I gave it to a worthy charity.  The next year, some worthy friends were having a party so I gave it to them.  The next year I had a party and we enjoyed the ham.

In the fifth year, about the tenth of December, I began wondering, where is my ham?

So it’s no wonder that people who would be appalled at the idea of accepting an expensive present from someone they do business with – say, a $1,000 gift certificate at Tiffany or an authentic Picasso lithograph – have no hesitation taking a cheap one. The natural feeling is that in order to be corrupting, a gift has to be valuable enough to make you feel you owe the giver something equally valuable in return.

As a result, many companies – including Dow Jones, publisher of The Wall Street Journal and WSJ.com – permit their employees to accept small gifts from people they do business with. Limits of $25 to $100 are typical.

Dow Jones’s code of conduct states:

Dow Jones employees should not solicit or accept, directly or indirectly, any payment, loan, service, equipment, or any other benefit or thing of value, or any gift, entertainment, or reimbursement of expenses of more than nominal value or that exceeds customary courtesies for that time and place from suppliers or customers, or from any company, individual, or institution that furnishes or seeks to furnish news, information, material, equipment, supplies, or services to Dow Jones, or from anyone else with an actual or prospective business relationship with Dow Jones.

“Of more than nominal value” has customarily been interpreted at Dow Jones to mean worth no more than $25 for employees of the news department. Dow Jones employees are expected to return gifts of greater value. If the gift is edible, it should be consumable at one sitting – like, presumably, a small box of artisanal Belgian chocolates.

But psychologists showed long ago that free food, in and of itself, makes people favorably inclined toward information that came from the same source as the food. How could it not? Why else would we have the expression “Don’t bite the hand that feeds you”?

No wonder one of the most common tactics used by high-pressure investment salespeople is the “free lunch,” in which elderly or naive investors are treated to a financial seminar over free food.

Why, then, do people – like some financial journalists – who are angered at the very idea of free-lunch investment seminars see nothing wrong with accepting free food themselves?

While we all recognize that gifts can make other people feel obligated to the giver, we don’t think we will – because of what psychologists call “the bias blind spot.” It is much easier to imagine someone else being ethically compromised by a small gift than it is to imagine yourself being similarly corrupted.

A survey of medical residents a decade ago found that 100% of them considered gifts from pharmaceutical companies – pens and lunches, for instance – “appropriate” so long as they cost less than $10. These doctors believed that such marketing tactics could influence their peers but not themselves: 84% said other doctors would be swayed by such promotions, while only 39% conceded that their own judgments would be affected even “a little.”

In a startling recent study, doctors and financial planners were separately shown an identical scenario.

The doctors were outraged to learn that financial planners might accept pens, coffee mugs or junkets from fund companies. Yet the physicians didn’t believe that accepting pens, coffee mugs or junkets from drug companies would compromise the integrity of doctors.

The financial planners wanted physicians to be forbidden from accepting gifts from drug companies – but saw no reason why financial planners should be prevented from taking comparable freebies from fund companies.

I first encountered this bias 15 years ago, when I attended a conference for financial advisers hosted by a big brokerage firm. At dozens of booths on the exhibit floor, mutual-fund companies handed out stuff like baseball caps, coffee mugs, candy, key chains, letter openers, notepads, pens, pencils, Rubik’s cubes, T-shirts, mini-flashlights, water bottles, yo-yos, baseballs, golf balls, gumballs, squeezy stress balls and countless other trinkets emblazoned with the names and logos of the fund sponsors.

I wrote an article (no longer available online) suggesting that financial advisers might be compromising their objectivity by accepting all this swag.

The next day, in one of the sessions, an adviser began his speech by ridiculing my post. He reached into the storage compartment of the podium and yanked out one of his freebies after another.

“Can you believe,” he asked the audience of advisers as he clapped a fund hat on his head, “that anyone could possibly think our integrity can be bought for the price of a lousy baseball cap?” The crowd hissed and booed.

What he and his audience missed, of course, is that the fund companies wouldn’t have spent all that money on swag in the first place unless they thought it would sway the financial advisers who took it.

American companies are believed to spend roughly $20 billion annually on swag. No one knows how much of that is spent by financial companies, although $4 billion to $5 billion probably isn’t a bad guess.

And it is money well-spent: Neuroeconomics experiments have shown that brand logos, once they are familiar, automatically activate the reward centers of the brain. By wearing that baseball cap, that adviser was bound to become predisposed toward the company’s mutual funds, no matter how vehemently he denied that it could happen.

Go to any brokerage or financial-planning conference today, and you will be confronted with a swagfest that beggars what I saw 15 years ago — as this hilarious video from my colleague Charles Passy shows.

If you step into an adviser’s office and see freebies scattered about, that’s a red flag: There’s a good chance that this person can’t be objective in recommending investments on the merits alone. And there’s almost no chance that he or she will be able to admit it.

It’s probably impractical to banish small gifts completely. But if I had my wish, codes of ethics throughout the financial industry — and journalism — would be changed to discourage small gifts as strongly as they discourage big ones.

Source: WSJ.com, Total Return blog