Information Asymmetry

Imagine talking to a prospective buyer for your business and he offers you $100,000. Let’s assume that you know based on the experience of running your business that it is worth a lot less than $100,000 but the buyer doesn’t have that context. 

In this case you are at a significant advantage because you possess the context/information that can tell you whether you are making a good deal or bad deal for yourself. The buyer on the other hand has a significant disadvantage because he doesn’t possess the level of information/context that you do to make an informed decision. 

This imbalance between the context/information among the 2 parties is known as information asymmetry. This is an important mental model to have in your arsenal, especially when you are dealing with something out of your circle of competence.

Bootcamps & Colleges

Most recruiters will look for the ability to learn & discipline to function while hiring for entry level roles. While most candidates might claim that they can learn and function as required, the recruiter understands that he/she is at a disadvantage since he/she is not privy to the authenticity of these claims. 

Enter - college degrees & bootcamps. 

While college education’s relevance in the workplace is debatable, finishing a college degree can be a reliable signal that indicates a person’s ability to learn and function. The same goes for bootcamps.

Ergo, when there is an information asymmetry like in the case of the recruiter, having a reliable signal (finishing college degree) can help reduce the risk of making a bad choice.

Negotiations & “Winning”

There are few places where information asymmetry plays a major role than when during a negotiation. In any sales/negotiation dynamic, your leverage will drastically improve as you accumulate more relevant information.

Let’s say you are interviewing at a new job and you are asked to share your salary expectations by the recruiter, what do you do? 

Do you want to state what you’d like to get? Do you want to put the ball in their court to make the offer? Do you want to go with the “industry standard”? - While all these can get you a net positive result, you can do much better if you gathered some critical information and negotiated based on that.

Things like getting to know what they are currently paying someone in a similar role? Is the company willing to pay more to make sure you don’t go to competition? Are your skills in demand and critical to the company’s operations? - Getting answers to all these questions can help you negotiate a much better salary.

War & Peace

It could be argued that more or less every war ever fought was due to information asymmetry on the part of one or more parties involved. It is not uncommon for warring leaders to under-estimate or overestimate the circumstances and their impact on the result. 

One of the main reasons that we have not had a full-blown war at least in the developed parts of the world in recent times is due to near-perfect information that is available to government agencies. This information helps governments plan peace treaties, soft punitive actions, sanctions etc while keeping the prospects of a violent war as far away as possible.

Information in this case is literally saving lives.

Countering Information Asymmetry

There are always going to be things that you will not know going into a situation where it could prove useful. But it is important to make a decent attempt at gathering all relevant information before you encounter such situations. 

  1. Look for signals, direct or in-direct. Example, if someone makes an investment offer look at their recent bets in similar or connected industries and assess the proposition. 

  2. Analyse choices to see if one or more of them involve getting out of your circle of competence. If yes, either avoid it or get a trusted expert to look into it. 

  3. Ask someone you trust to look at the offer/circumstance and give their opinion. It would be better if they didn’t know your inclinations and preferences. 

  4. Exercise second order thinking and examine whether the choice you make will have consequences beyond the immediate ones. 

So that’s all about information asymmetry, some of its applications and how it can be countered. What are your thoughts on this? Let me know by responding to this email.

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