What Is Information Asymmetry?

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What is information asymmetry? What are the ethical implications of asymmetries in information?

Asymmetry of information is where one party involved in a transaction has more information than the other party. According to Nassim Taleb, the author of Skin in the Game, asymmetry of information is essentially the same as asymmetry of risk. When there is a hidden imbalance of information in a transaction, the party with less knowledge incurs more risk.

In this article, we’ll explain how the risk created by information asymmetry contributes to unethical transactions.

Information Asymmetry Is Bad for Everyone

Asymmetry of information is a common talking point whenever the ethics of transactions are discussed. But first, what is information asymmetry?

Information asymmetry occurs when one party of the transaction has more information than the other. Economist Tim Harford argues that, in the long run, asymmetry of information benefits no one. For instance, if customers in the market for a used car have no knowledge of which cars are reliable, they would be far less likely to take the gamble of buying one. Everyone loses. For this reason, honest sellers intentionally try to close the information gap by signaling quality—building a trustworthy reputation. For example, a well-decorated storefront signals that the sellers there are unlikely to pack up and skip town after getting away with a bad deal—they’re trustworthy.

If all sellers operated like Rav Safra, the market would operate more effectively. Buyers would happily spend money on the best deals available, and the sellers offering the best deals would have the most success. This is why Taleb considers transparency a moral imperative.

Nassim Taleb: Unethical Asymmetries of Risk

Risk is unavoidable in an inherently uncertain world. Danger occurs when some people, and not others, are aware of specific risks. People frequently use this information to unfairly pass some of their risks onto others.

This is why Taleb emphasizes the idea of asymmetry—hidden imbalances in risk are unethical. Intentionally making your desires more likely by making the desires of others less likely—transferring risk—is, in Taleb’s eyes, theft.

There are examples of unethical imbalances in risk all around us. For instance, some argue that the information collected by the government to calculate appropriate financial aid is helping schools drive up tuition, as they are made aware of exactly how much a family can afford. The school’s risk of losing income is mitigated, while the quality and potential value of the student’s education remain an uncertain risk. Asymmetries of risk that involve the asymmetry of information like this are the most dangerous, as they’re more likely to go undetected.

The Ethics of Transactions

People often pass on risk by masking it as a gift such as helpful advice, a good deal on a valuable product, or a wise investment. It’s difficult to tell whether gifts like these are helpful or harmful—which is why there should be skin in the game. You shouldn’t accept “gifts” like these unless the giver has something to lose if it ends up being harmful.

For example, if an insurance salesman is giving you the hard sell for a life insurance policy, ask if the salesman himself is on the policy. If it was a bad policy, he would be getting ripped off, too—his skin would be in the game.

Another example: If someone sells you a pressure cooker that malfunctions and explodes, causing you bodily harm, you should be able to sue for massive reparations. This puts their skin in the game.

This also means that, if you’re selling something, you can deliberately use skin in the game to signal honesty and gain the trust of your customers. This is how money-back guarantees work—sellers are staking their profits on the quality of their product, giving their customers peace of mind and making more sales.

Author Tim Ferriss takes this idea one step further with something he calls a “lose-win guarantee.” When he sold athletic supplements, he offered to give customers double their money back if they were unsatisfied. The visible skin in the game hooked customers, and the money he lost fulfilling the guarantee was less than the extra profits it earned. 

On the sellers’ side of things, Taleb outlines specific guidelines for honorable, ethical transactions.

Guideline #1: Sellers should be transparent about the product.

Not only is it unethical to actively mislead your customers, it’s also unethical to hold back any information that might dissuade them from agreeing to the transaction. For example, it would be unethical if someone sold you a house without letting you know it’s built on a cracked foundation that will soon require repairs.

This debate dates back to the Stoic philosophers of the second century, with some arguing that the seller’s only obligation is to reveal only what is required by law. Taleb is of the opinion that the ethical thing to do is to ensure total symmetry of information.

Guideline #2: Sellers should be transparent in their intentions.

In Taleb’s eyes, any marketing or negotiating tactic that involves misrepresenting your intentions is unethical.

To explain, he recounts the story of a third-century Jewish scholar named Rav Safra. A customer approached Safra while he was praying and asked to buy some wine. Misinterpreting Safra’s silence as a refusal, the customer negotiated against himself, offering more and more money for the wine. When he finished praying, Safra insisted on only taking the customer’s lowest offer, since he had initially intended to accept it. He saw any advantage caused by an asymmetry of information as unethical.

Taleb recognizes that these ethical guidelines are rarely followed in practicality and would be difficult to implement in a body of law. Still, we should strive to achieve symmetry of information in any transaction.

What Is Information Asymmetry?

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Like what you just read? Read the rest of the world's best book summary and analysis of Nassim Nicholas Taleb's "Skin in the Game" at Shortform .

Here's what you'll find in our full Skin in the Game summary :

  • Why having a vested interest is the single most important contributor to human progress
  • How some institutions and industries were completely ruined by not being invested
  • Why it's unethical for you to not have skin in the game

Darya Sinusoid

Darya’s love for reading started with fantasy novels (The LOTR trilogy is still her all-time-favorite). Growing up, however, she found herself transitioning to non-fiction, psychological, and self-help books. She has a degree in Psychology and a deep passion for the subject. She likes reading research-informed books that distill the workings of the human brain/mind/consciousness and thinking of ways to apply the insights to her own life. Some of her favorites include Thinking, Fast and Slow, How We Decide, and The Wisdom of the Enneagram.

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