Dealing with information asymmetry

You’ve likely faced situations where you felt you were being played, but couldn’t put your finger on why or how. Like a “deal” on a used car, it feels too good to be true, or you felt doomed to make a suboptimal decision.
In these situations, one party has better information than others, aka information asymmetry. It can be a problem if you’re on the wrong side, but it can creates opportunities to build new businesses. For example, Expedia, Glassdoor and Zillow make money by resolving information asymmetry.

How do you know when it’s happening?

  • The stakes are high and getting it done is more important than getting it right. Imagine you’re a tech founder, about to IPO your startup. You’ve worked on this company for the last 8 years and now it’s time for your big payday. There are many investment bankers telling you “how it’s really done”, or sharing examples that prove their expertise and usefulness. They tell you how your company is a unique snowflake, and that you must do everything how they tell you to. Few founders are willing to take the risk of getting this wrong. Statements to look out for: “Trust me, I know this space and have done many like this”, or “This time / person/ house is different”.
  • The other side makes money regardless of the outcome. For example, no matter what you pay for a house, the real estate agent makes a healthy commission.
  • Pricing is opaque and fees are discretionary. Before Expedia, travel agents made money because it was difficult to compare prices. Expedia made that information available, and today it’s much easier to do so. The same thing happened with Zillow and real estate in the US.

What to do if you’re in one of these situations

  • Get many sources of information and corroborate everything. For example, you should not trust the recruiter when she says “I can’t offer more”. This is not as easy as it sounds, especially for underrepresented minorities and outsiders. Also, the information you need may be proprietary or difficult. Try cold emails or DMs on Twitter and LinkedIn. It’s a red flag when your counterparty is also your only source of information.
  • Move beyond opinions to facts: Keep it fact-based as much as possible. One trick charlatans use is keeping the conversations vague, while appealing to your fear of getting it wrong. For the most part, experience can be reduced to data. If you’re going to trust someone, be sure to confirm that the data proves the experience.
  • When possible, every party should have skin in the game. Offer a share of any upside or downside from the results of the transaction. In most commercial cases, these incentives will lead to better behaviour.

One more thing you can do is to ask better questions. You may not get the answer you want, but the answer will tell you everything you need to know. An example of abetter question is “What would you do if you were in my shoes?” vs “What should I do?”. The former tells you more – about the person, if not just the problem.
To learn more about building businesses that resolve this, read this NYTimes profile of Rich Barton, founder of Expedia, Zillow, Glassdoor. If you’re in the mood for a book, read Skin in the Game by Nassim Taleb.

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