Implications of Costly Information

http://www.econlib.org/library/Columns/Teachers/information.html

Through the process of selecting menus for an upcoming reception, I have come to realize that I know essentially nothing about wine. I can taste a couple of glasses and tell you which one I like more, but anything beyond that, like knowing whether this merlot or that cabernet sauvignon would go better with which proposed entree, and you might just as well give me a coin to flip. The information is out there—there are books, wine-tasting clubs, and the like—but I don’t have it. What’s more, I am not going to get it, even though doing so would improve the selections I make and so enhance the pleasure of the guests at the reception.

The reason is that information about wine or any other subject is costly to acquire. Time, effort, and resources must be devoted in order to locate, gather, and assimilate information. In this respect, information is a good, and people need to decide how much of their resources they want to devote to acquiring it, just like they need to decide how much to spend on housing, cookies, swimming lessons, and everything else. Because information is costly, there is so much of it out there, and people have so many other desires beside acquiring information, they are not likely even to be able to approach full and perfect knowledge on any subject.

Importantly, though, even if a some people have the capacity to maintain such a mass of information, nobody should really want to know that much about a subject. Very few of us ever make decisions that require such detailed knowledge.

Individuals are not, of course, omniscient, even those who think themselves to be. The securing of information about the predicted effects of alternatives is a costly process, even in a world with reasonable certainty. Recognizing this, individual utility-maximizing behavior remains "rational" when choices are made on the basis of less-than-perfect information. There is some "optimal" investment in fact-finding and analysis for the deciding individual at each stage of his deliberation.

The Economics of Information (摘抄)

//From backcover

Information is a key issue in decision making in economics and business. Being ‘in the know’ confers strategic advantages to people, allowing them to lie and/or cheat on their uninformed opponents. However, it is possible that all sides end up worse off in such situations, compared with the likely outcome under full information.

//From Chapter1 Introduction

Lying and cheating are facts of life. They pervade all aspects of human existence. Books, TV shows, films and newspapers thrive on stories of deception and betrayal. Pop songs are full of tales of broken-hearted lovers who have been taken in by their partners. Half-lies and downright falsehoods are the stock-in-trade of politicians, diplomats, business executives, lawyers, accountants and ordinary everyday people. A glance through pages of Bible would be enough to show that this state of affairs goes back to time immemorial (think of all those tales of intrigue and deception). The mere fear of dishonestry and breach of promise can also do damage, even when in the event people behave truthfully.

This book is about understanding the role of information in situations which potentially give rise to such behaviour, and analysing the consequences for the people involved.