Mental Model: Information Asymmetry

The concept of information asymmetry seems fairly obvious from its name. However, as a mental model, it deserves deeper study to fully understand all of its nuances.

At its most basic, information asymmetry describes a situation where two parties have different quantities or qualities of information. When one person has more or better information than another, they have a massive advantage. This model shows up a lot in investing, but can be applied in many areas of life.

For example, I remember being intuitively aware of information asymmetry during my poker days despite not knowing the concept by name.

In Poker

By design, poker is a game of incomplete and asymmetric information. The information is incomplete because you don’t know your opponent’s hand, and it’s asymmetric because you either act before or after your opponent based on your position.

This is what makes “having position” (acting after another opponent) so powerful. By definition you have more information than they do when making a decision and should be able to take advantage of that fact. Any poker player worth his salt will make more money per hand while “in position” than while “out of position.”

Another Type of Information Asymmetry

As the poker industry grew, people started businesses coaching and training players. In the past, this information was either very hard to find, or required in-game experience to be attained. The advent of these poker training sites made accessing high-quality poker knowledge much easier, eroding the informational advantage that many good players had over their opponents.

Players who were once dominant at their level started to win less from mediocre players or break even with players slightly worse than them. Of course, they also had the opportunity to improve their play as well, but the simple fact is that the poker training and coaching markets made the games harder because high-quality information was easier to attain.

Applying The Concept of Information Asymmetry

There are a lot of ways to apply this concept in life. One way is to realize when you have an advantage in amount or quality of information and use that to your benefit:

  • You’re selling an item and you know more about its quality and condition than a buyer
  • You’re hiring at your company and know what you pay other employees for the same role, but the potential hire does not

Another way to use this concept is to seek out market where there information asymmetry is rampant and seek to equalize it:

  • Glassdoor arms job-seekers with information about company culture, salaries, and quality of life
  • The Wirecutter arms consumers with in-depth information about consumer products
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