The Economist: The Value and Disvalue of Information

Can you imagine what a ruse the stock market would be without a regulatory agency like the Securities and Exchange Commission? Or what products would and would not contain were it not for federal agencies like the Food & Drug Administration or the Federal Trade Commission? We often think the lack of competition as the biggest problem distorting markets. In reality, the lack of information may distort market outcomes far more 
than competitive factors. As Kati Cseres states in her research:

“When consumers have insufficient information about the choices they can make or they face high search and switching costs, they are not able to take the advantages made possible by effective competition and 
to activate competition.”

Without good and affordable information, we rely on “buyer beware.” This is why we gravitate to brands and companies we trust. In other instances, we rely on product or service disclosures or pursue research to gather information. Such research can be costly. When there is no “trustworthy” information or brand, then buyers assume they face greater risk and will appropriately discount the price they are willing to pay. As a result, while some products in a market may be good, some may be bad, and the buyer cannot tell the difference. This led economist George Akerlof to conclude decades ago that the overall quality of the products will diminish when there is asymmetric information (information known only by the seller). This lowers average prices, then drives sellers with better products out of the market, leaving only lemons.

Responding to this “adverse selection” problem requires companies to brand their product with credible claims that prove true and for industries to pursue regulated disclosures to force the bad actors to play fair. Unfortunately, knock-offs make branding a challenge. In other cases, marketers develop regulatory work-arounds or companies gain access to politicians and agencies to protect their asymmetric (at best) and deceptive (at worst) information. Consumer products provide many examples of this from labeling. Purchase dimensions most important to consumers are most susceptible. For instance, what does “natural” mean? My personal favorite is a well-known brand legally touting “no fat” in its product by keeping its stated serving size ridiculously small.

The Colorado Attorney General’s Office oversees consumer protection for the state. Unfortunately, the office is sufficiently overwhelmed with the most egregious claims as well as fraud prevention and prosecution to have little time to promote more education around symmetric or balanced information. This is left primarily to the Colorado Department of Regulatory Agencies (DORA), which regulates specific professions. Residential real estate transactions are heavily regulated, with sellers required to disclose many aspects about properties under contract. These disclosures force “lemons” to be more forthcoming. Despite the good intent, many sellers have every incentive to disclose the minimum, which is why licensed brokers and inspectors can provide great informational value to buyers. The size of resale home and car transactions is large enough to remind me that it’s not just businesses that are motivated to selectively disclose information. It appears ingrained in our culture and is probably inherent in Adam Smith’s “invisible hand.”

One of the greatest aspects of the internet age is the potential for direct consumer to consumer communication. BrightLocal, a search engine optimization company, has been surveying online users for about a decade and finds 97 percent of consumers (with internet access) looked for local businesses online and 85 percent trust online reviews as much as personal recommendations. Unfortunately, fake reviews are common, and 85 percent of respondents were not sure they could spot phony reviews. The free ratings found on sites like Google and Yelp demand sources like the Better Business Bureau (BBB) and Consumer Reports (CR) elevate their games.

Despite the great gains realized from a neutral internet where consumers can access more information at a lower cost, there is still a long way to go. Information brokers somehow need to monetize their efforts without developing bias. If there was ever a time to support groups like CR and BBB, as well as other platforms serving as unbiased depositories for all reviews, it is now. These depositories need analytics to spot and report real trends versus fakes and frauds.

My son once said, “Trust is hard to earn and easy to 
lose” in an essay he wrote as penance for being an 
adolescent. I fear the outcome if we do not work hard to earn and maintain trust for information to support our purchase decisions. At what point does poor information destroy free markets and devalue our economy and 
ethics beyond repair?