Information Asymmetry – Part 1

Very simply “Information Asymmetry” means the flow of information in whatever form you consider it, is not uniform. Meaning, not everyone has the same information. And that, can provide different things to various people. Access to information that other’s don’t have can change the balance of power. Power, however you wish to define it, comes from information. Information is power. Many have said, money is power. Yes, that is true. But, money is typically made when there is access to information that other’s don’t have. Therefore, by the law of associativity – Information is Power.

I have always wondered about it and marveled at the asymmetry of information around us. A great example for me is my drive to work. I am currently located in New Jersey where traffic is heaven, if you know what I mean. The roads are packed in the morning and everyone is in a hurry, sipping their morning poison – coffee (BTW, I love coffee), listening to radio and basically trying to find gaps in traffic where they can make their moves and advance. It’s quite fascinating to be part of, actually. It’s almost like a dance. Each vehicle can be considered as a random variable. But, when on a highway that is crowded, the randomness goes away and is replaced by a dependent variable. Meaning, that the behavior of each vehicle is dependent on the other’s around it. The interdepedency on any given day can be modeled by a log-normal distribution. But, between days there is no interdependency in the traffic flow (just like the stock prices) and Poisson’s distribution could be used to elicit that. But, we’ll not get into statistics here.

In traffic, there is a constant flow of information. From the driver’s vantage point, information exists in the form of what they can see. And based on what they see, they react or act. React, when the vehicle ahead of them brakes suddenly. Act, when they see a gap where they could squeeze in their vehicles. Reaction and action is based on information. If a driver does not react in time, there could be an accident. Correspondingly, if a driver does not act in time, it’s a missed opportunity (not always – I’ll get to that later).

Not all the information in traffic is flowing uniformly. There is information asymmetry. And that means opportunity for some drivers to take advantage of. A driver in a SUV, van or a truck has an advantage simply because they are seated higher and can see ahead or merging into traffic from a higher ground allows drivers to see what most can’t. Meaning, they have more information than those drivers who are driving a car – the unwashed masses. They can see potential roadblocks, accidents, construction zones, speed zones, a cop car ahead etc. They have a competitive advantage. Now, that advantage is wasted if drivers don’t act upon it. If they act, there is risk. Because, others who have the same information could also act at the same time or thereabouts and all of a sudden your advantage vaporizes. Timing is critical. But if you are the only driver in that clogged road who possesses information that the rest don’t possess, now that is definitely worth something. It is worth even more, when you act upon the information and leave others in the dust.

While visual information is certainly advantageous, there do exist other sources of information that can dull the visual advantage. Radio is one such source. Folks listening to traffic reports can hear what’s unraveling down the road. Furthermore, GPS devices and mobile phones have gotten sophisticated enough where they are able to give you traffic conditions ahead. But not everyone has this technology. If I were to rate the importance of information flow in traffic, I would give visual information the highest marks. A driver who possesses this information could augment the same with additional data from their GPS device that would help plot alternate routes to circumvent traffic or roadblocks ahead.

Radio is an information equalizer – not much to be gained there.

This is interesting – right? In a business environment, information asymmetry can create competitive advantage. Not always, but it can. Just like in traffic, when a driver who has more information than the rest decides to act, two things could happen. One, the driver could coast to freedom – meaning that information he thought he had was correct and the beat out the traffic. Two, the driver could end up cursing himself as the detour that he took based on the information he had could result in additional roadblocks or even a dead-end. He could have been better off just staying the course. How many times, has this happened to you? I have found myself in this situation more often than not. The risk exists only when you act on the information. You gain or lose nothing if you don’t act.

Information asymmetry exists everywhere. And, it is interesting to see how the balance of power, be it in the office or the market, is influenced by the disparity in information flow.

In my next post, I’ll try and explore a few instances as to how information asymmetry impacts the business world. Have you experienced information asymmetry in anyways? Care to share?…

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8 Responses to Information Asymmetry – Part 1

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