Informational Asymmetry

College Confidential Community
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<p>So I encountered this interesting phenomena when reading “Freakonomics.” Basically, it’s the asymmetrical sharing of information - that some people have more access to the same amount of information than others. Many people take steps in order to actively ensure that informational asymmetry exists.</p>

<p>Oftentimes, it seems to imply a lack of trust, even if the motives are well-intentioned. As a starting point, when I used to play Civilization III, I’d always keep my technologies secret from the computer players - since I knew that I could not trust the computer. * So by refusing to share technologies (or by charging high prices for them, I promote such asymmetry). </p>

<p>Indeed, when security is vital, information asymmetry is necessary. The military requires information asymmetry. And in the past, when wars were more common, such asymmetry was vital for survival.</p>

<p>But now when people have much more to lose from war (The World is Flat provides excellent reasons), informational asymmetry is less desirable. Nonetheless, it still exists, in intra-societal conflicts. Many professionals (and in the Middle Ages, guilds) promoted information asymmetry in order to ensure that their livelihoods would not be threatened. If their “secret methods of teaching” are revealed, so to speak, they may be criticized heavily for such methods. Many companies also promote informational asymmetry in order to make money. They effectively use the sale of information as a way to do this. </p>

<p>Indeed, resistance to information asymmetry is one of the main promoters of the open source movement. </p>

<p>What do you all think?</p>

<p>===
*Analogies have two purposes. One is to imply a possible shared causal connection between A => B and C => D, when the same connection could make A => B and C => D. When I argue the point “just because you’re well intentioned doesn’t mean that I should accept your argument because you really don’t know what’s best for me”, I draw the analogy with the example “R’s mother J may forbid R from taking medication for R’s illness, even if such medication is shown to be highly effective for the illness. J may be well-intentioned, but that doesn’t mean that J’s arguments should be taken.” In this case, there is a possible shared causal connection between my parents and I, and R and J. </p>

<p>The other use of the analogy is to make explanation of a concept H easier (or in the direction that the author intended, given how the phrase can be somewhat ambiguous). H is more abstract than K, and harder for mortal minds to understand. Thus, to explain H, draw an analogy between H and K. This is the analogy that I’m using above. One can argue that Civilization III bears no relation to real life, which is true. But I still make the analogy.</p>

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<p>Informational Asymmetry in many cases is beneficial. Suppose Country X has a technology which it doesn’t wants to Share with Country Y. Country Y would then have to develop it’s own technology which could even be better (technologically and economically) than of Country Y’s. </p>

<p>Take Operating Systems for example. If windows was free (open source) who would have cared about Linux (which is arguably better than Windows).</p>

<p>I equate Informational Asymmetry with Capitalism and Darwin’s law of Natural Selection (=good).</p>

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<p>The resistance to information asymmetry is not new. During World War II, while the Manhattan Project was underway, we were able to gauge which direction and how far advanced the Germans were to developing an atomic weapon because German scientists insisted on publishing findings in journals. Similarly, American scientists were appalled by the notion that their scientific achievements had to be kept secret. The concept of hiding major breakthroughs in physics and chemistry from the scientific community was alien to the scientists involved.</p>

<p>The free market system assumes ubitquitous and perfect knowledge. Predictive models that advocated for capitalism assumed that the market was driven by people acting on real-time and perfect knowledge of all factors relevant to the decision. Later, more complex models had to be developed because knowledge is rarely delivered – and assimilated – in real time and often there are people who have superior knowledge…which is generally advantageous. As more and more people realized this, more and more people have taken strides to maintain – or establish – these sorts of informational advantages. And predictive models had to be developed to account for information hoarding.</p>

<p>And then there’s war. As Winston Churchill said, “In time of war, Truth is so precious that she must be protected by a bodyguard of lies.”</p>

<p>None of this is new. It’s just old wisdom articulated anew.</p>

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<p>Wow, thanks for the posts! Very insightful!</p>

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<p>I’ll probably come back and reply when I don’t have a research paper to write, but…</p>

<p>“H is more abstract than K, and harder for mortal minds to understand”
sounds really condescending… in a funny way =) I laughed when I read this sentence.</p>

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<p>in theory information asymmetry is a type of market failure, because if not everyone shares the same info then the market signals will indicate things that might not be necesarilly true ( say higher prices even though the good or service isn’t in high demend)… I don’t agree that information asymmetry can be equated to capitalism, if at all it is one of the main barriers for an absolutely liberal market. Nor do I believe that information asymmetry leads to efficiency trhough the development of new technologies, new technologies develop regardless of the information that a firm holds. Firms will always seek to reduce their marginal costs through increased technology, ionformation assymmetry simply slows down the spreading of this technology and thus creates an overall opportunity cost for society in the short run. but yeah, what ever I’m off to get yogurt…mmmm strawwberryyyy</p>