Note from the CEO: WOW!!! I have been in the financial markets for over 40……..er, quite some time and never heard the term “asymmetric information”. All I can say is this is a really REALLY an enjoyable, cool read. But I love behavioral analysis.
“There’s a very deep, important concept in economics that gets way too little attention from the public (and possibly from economists themselves). This is the idea of asymmetric information. The concept has been around for decades, and research about it has won Nobel prizes, but neither the profession nor the public has ever put it at the center of our understanding of markets1. That should change.
When today we debate issues like financial regulation or high frequency trading, it helps to think about financial markets as being driven by differences in how much people know.
The Economist recently ran an article looking back at one of the seminal research papers about asymmetric information — George Akerlof’s “The Market for Lemons,” published in 1970. That paper showed why it is that when sellers know more about products than buyers do (or vice versa), markets can break down. It doesn’t matter how rational people are, or how well the markets are set up — asymmetric information throws a wrench in the works.”