The effects of Incomplete Information

We never have had all the information needed available to always make the right decision, and still don’t. This occurrence of imperfect information affects the quality of our decisions, because if we don’t have all of the facts to hand, that decision is more likely to be made incorrectly.

For example, managers almost always make decisions on the basis of non-systematic information collection ("I was talking to so and so and they were telling me such and such is good... I read it in the paper... ). Similarly as consumers we buy what is on sale in the nearest shops or we buy from someone because we got a leaflet through the door or they rang us up.

It is amazing how people persist in buying products which cost the same but have less functionality, or cost more for the same features. This happens because they do not know about the alternatives. For example, people pay very high prices for international telephone calls because they are not aware that many companies offer inexpensive and easy to use international telephone services. Let the buyer beware.

Inferior products can survive in the marketplace because of imperfect information. They exist, they have a presence, they advertise, they have a sales force out on the road, and purchasers do not know about the better or more appropriate alternatives.

On the other hand, incomplete information also fuels brand power. Brands help consumers to feel more confident that they are not making the wrong decisions despite imperfect information (as in, you can’t go wrong with any food from Marks and Spencer: its all good quality). Dominant standards such as those in the computing and telecoms industries make consumers feel more certain and less confused about which standard to purchase. These standards can even be technologically inferior, because this disadvantage is outweighed by the advantage of having a stable industry force.

Because gathering and acquiring information is costly, it is imperfect. Typically, the more expensive the purchase, the more consumers will seek out full details about the product, trial it if possible, take it for a test-drive, find out about alternatives and such like. In such cases, the cost of the time and effort invested is easily recouped in benefit from improved purchase decisions. However, even with low priced items such as food, consumers have sharp instincts for searching out bargains. These days, we boast to our friends about what we saved, not what we spent.

Decisions will never be perfect even if we could achieve the theoretical impossible and hold complete calculations of all costs, benefits and alternatives products and suppliers. This is the case because even with complete and unbiased information, different individuals are likely to interpret that same information in different ways depending on their personal upbringing, prejudices and past discoveries. As usual we need to determine our actions based on as much information as we can gather and not set policies which wrongly assume that the theoretical assumptions and perfections exist.

That said however, enabling technologies are improving the situation by reducing imperfections in our information- making it easier (and therefore less costly) to find out more valuable information. Of course, information, just like the goods themselves is only as reliable as its source: which is why independent companies which evaluate categories of goods such as Which? and Best Buys for Business tend to be widely referred to.

The Internet and electronic agents in particular are helping to provide consumers and purchasers with more complete information before they buy. That information is available from a single source called the Internet (lowering the costs of finding it out) and more easily searched and filtered using personal electronic agents which can find a certain product with certain features at a specified price.

In conclusion, the existence of imperfect information is a negative thing because it means that people often buy goods which are not suited to their requirements or less reliable or more expensive than other comparable products on the market. But as enabling technologies provide consumers with more information in a more readily accessible form, the perils of information ignorance are being reduced.

 

Author: Simon Buckingham

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To make a comment to the author, send e-mail to simon@unorgan.com

 

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