In the last post I talked about the market version of the perfect world. Ahhhh...Imagine living in such a world when it comes to dating. Nice, sincere, honest people get greatly valued for who they are, and everyone knows the true colour of the nasty ones. A world where no one could get away with lying and cheating. None of that I’ll-be-a-perfect-gentleman-for-now-but-I-really-just-want-to-jump-your-bones, or the I’m-a-committmentphobic-but-I-won’t-tell-you-till-six-months-down-the-road, or the I’m-not-over-my-ex-yet-but-you-seem-like-a-good-distraction.
Wouldn’t that be nice?
Of course, we don’t live in an ideal world like that. Remember in high school chemistry class, and they told you a dozen rules, and then a zillion exceptions to them? And only the exceptions were ever really on the exam? Same thing with economics. Economists come up with a perfect world for us to fantasize about for like, ten seconds, then they tear us down with the exceptions.
When a market is not working efficiently, it’s called Market Failure. Quite a number of things could lead it that, but for now let’s talk about one in particular called Information Asymmetry.
What is Information Asymmetry? It means one person has more or better information than the other, and that gives him/her an upper hand in the market. How could this happen? Remember the little town we talked about where news spread like wildfire? Imagine that it’s not a small town, but a large city where people don’t even know their neighbour’s name.
Even if a segment of the population had tasted the awful toothpaste or the heavenly bread, not everybody is going to know about them right away, if ever. The toothpaste might get away with charging $5 for a long while before people catch on. Have you ever seen a very old scam still going strong, and wondered why people haven’t learned by now?
In reality, not everyone has the same, or the right information, or gets it in a timely manner. So products get under or overvalued.
(continued in my next post...)
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5 comments:
"Wouldn’t that be nice?" Yep!
Is this why insider trading is illegal, as an attempt to eliminate information asymmetry?
Instead of information assymetry, some people also go for total lack of info, like one night stands where they don't even want to know the other person's name. For actual relationships though, lack of info kills (the relationship). :|
To Chris: That's one way to look at it. See, in the *perfect world*, nobody is supposed to have any more infor than anyone else. For insider trading, the attitude is "well, since you know more, you gotta shut up about it".
To Andrew: Talk about one night stands I have a little piece about STDs coming up!
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Thanks for posting!