Friday, September 14, 2007

Just what the hell is "asymmetrical information" anyway?

Great question, Fishbone! We've all been doing a lot of grousing about a certain blog called "Asymmetrical Information" over at the Atlantic - but it's quite possible that some people don't know what that term means. So let's get into it, shall we?

The first (and snarkiest, and most pedantic) answer is that there's no such thing as "asymmetrical" information. However, there is a concept in economics called asymmetric information, which is probably what McArdle was thinking of when she named her blog. Varian (1992) defines it as a "situation[] where one economic agent knows something that another economic agent doesn't (p. 440)." This is a definition I like because it is both clear and simple, which are two qualities sorely lacking in most economics writing. Varian's examples are that of a worker who knows more about his own potential levels of productivity than his boss does, or of a manufacturer who knows more about the potential flaws in the product his company sells than do his customers.

That time you bought a used '77 Pinto nice reliable-seeming used Toyota Camry, and the transmission fell out on the way home? And when you went back to complain, the guy who sold it to you was totally laughing at you out of the side of his mouth? Asymmetric information at work.

The reason that this strikes me as worth talking about is that people like Megan McArdle just looooooove to preach about the Power of The Free Market. Just let the market work, silly liberals, and optimal outcomes will occur while you sleep. Everyone will be better off, the rising tide will lift your shitty little boat too, tra la la.

Clearly, however, that's not true. Sub-optimal outcomes occur, and real-world instances of asymmetric information help bring about sub-optimal outcomes like your car leaving its transmisssion in the middle of the Sunshine Skyway Bridge during rush hour.

The idea that a cheerleader for an unfettered free market would name her high-profile blog after one of the reasons that unfettered free markets don't work out so great is, to me, deliciously ironic and oblivious.

But I'm sure she'll say it was just a joke, right?


M. Bouffant said...

Howdy Fishbone, & welcome!

So Megan is saying: "I know something you don't know."

What I've gleaned so far from Ms. McA.'s efforts is that economics is a collection of cranks fighting about statistical methods. But what do I know?

Thanks for the expertise. Maybe we'll all come away from this w/ greater knowledge of the "dismal science."

Anonymous said...

A key point of this asymmetric-information idea -- it's a Bad Thing. It impairs market performance, supposedly, in a way that both sides lose out -- even the party who have access to better information.

I have read Tim Harford's book, The Undercover Economist, which is how come I'm now pretending to have a deep and intimate knowledge of the topic.

Fishbone McGonigle said...

What I've gleaned so far from Ms. McA.'s efforts is that economics is a collection of cranks fighting about statistical methods.

Yeah, it's unfortunate that so many people who talk and write about economics end up reducing it to exactly that. Hell, many of my professors in grad school did that, which was a big factor in my decision to leave economics after I got my MA (my PhD work has been in a different social science).

Ultimately, economics is about the allocation of finite resources, and how and why people make the allocation decisions they do. Statistical and econometric analyses are important for comparing various model predictions to actual events, of course, but some of the Randoid types tend to forget that human behavior cannot be completely explained by an ordinary least squares regression model.

brad said...

Excellent post.
Still two contributors to hear from, but friday night ain't exactly primetime for it.

Anonymous said...

better posts, but still boring...Brad, i believe this your blog, but it really would be much richer without you, even without further references to Mr. Poopy Pants

brad said...

I'll be posting more on topic eventually. Megatron didn't give much material today, and I've been busy watching the Yanks live out the season in the microcosm of a single game.

Fishbone McGonigle said...

Oh, shit, brad - if I had known you were a Yankees fan, I probably would never have agreed to work with you . . .

tau factor said...

Thanks for this post, fishbone.