Perception Asymmetry

Economists should be familiar with information asymmetry. It is when two agents interact with an unequal distribution of information between the two. This can lead to one party taking undue advantage of the other and getting a greater benefit from the exchange that ensues.

In a market context, it very clear what information asymmetry entails. For example, the harmful effects of cigarettes were known by the tobacco companies but kept from public view (watch “The Insider”, brilliant tale), this allowed them to continue to drive up sales.

Keeping a lid on the findings allowed the tobacco companies to peddle their cigarettes as “cool” and “manly”, it allowed them to create the “perception asymmetry” and to profit from it. In a market, the effects of an information asymmetry can be clear and differentiated. As the information asymmetry lies with one of the two parties – buyer or seller.

Can there be a “perception asymmetry” without information asymmetry between the participants?

In a way. Take the game theorist’s favourite example: Prisoner’s Dilemma.

Two criminals are caught by the police, they are presented with the following options –

  • Say nothing and both are charged with a minor offence that puts them in jail for a year.
  • Confess with the other saying nothing and go free with the other locked up for 10 years.

Both the prisoners, in their effort to free themselves, confess and implicate each other, and end up in jail for a good length of time. That underlined part is where the perception asymmetry lies. The prisoners, both hoping to get free, end up in jail.

Both the prisoners were led to believe, by the police, that they could go free if they confessed and the other did not.

Keeping the example in mind, make a note of where the information asymmetry lies. Is it between two parties who are interacting with each other on an otherwise level playing field? Or is it a third entity who is a part of the system setup as well? A third entity who is a part of the system could arrange the “information asymmetry” to create the perception of an outcome different than the actual outcome of that action. In other words, it allows the third entity to create a different perception of the rewards of an action, the perception asymmetry.

Background story: I realised this after breaking out of a web of lies that was beautifully built around my naivety.

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