Nova workboard

a blog from young economists at Nova SBE

The lack of information

During a purchase we are confronted with many questions: how much should I pay for such thing? Why am I the only one that are willing to pay this amount for that? What am I seeing that no one is seeing? Do I have all the necessary information to do this purchase?

All this questions happen because people do not have access to all information needed to do a choice, people are confronted with uncertainty. There are two types of uncertainty, one in relation to the real value of the good bought, the value in the moment that the transaction occurs and other to the value of the good in the future. The first problem of uncertainty leads with problems of asymmetrical information, the part that is selling the good have more information than the part that is purchasing. They know the real value of the good but buyers do not know, so in order to lead with this type of uncertainty they decrease their value of the good, the amount that they are willing to pay for such good, in order to prevent them from losses. The other problem is just speculation about the value of the good taking in account the value of the good in the future. If the buyer thinks that the good in the future will value much more than now, he probably will be willing to pay more for such good the good, and otherwise he will willing to pay less for it.

Other reason for these questions is due to little information: the buyer does not know the valuations of the good of the others buyers. If he knows the valuations of the other buyers he is more certain about the value of the good, so he is willing to pay more for such good than in the case that he does not have this information.

This problem appears all the time in the real life and people have to make choices in the moment, they have to decide between buy or not buy. As I said above, people are more willing to pay if they have more information about the good and if they know the valuations of others purchasers, and according to this sellers have more expected profits. So why do not they release all information that the buyers need? And my answer is, because sometimes they bought the good from other person and this person did not show them all the information that they need to evaluate the good so they overestimate the price of the good, and fell in losses. They now have a good that they over evaluate and have to sell it as fast as possible and for one price higher them the price they paid for it to make a profit. Seeing every person like a seller and a buyer at the same time this will lead with a vicious circle, until someone pays for the lack of information of the buyer that initiated the circle.

In generally goods with great value have institutions that certify their value, for example when we buy art we ask for a certification of authenticity. The lack of information is amplified when we buy goods in markets that do not have any entity that certify the value of the good, for example buying things online or buying things direct to one person. In this case, people are buying a good only taking in account their knowledge, or resort to a specialist in order to reduce this lack. Many times the goods are bought in the moment or with few moments of appreciation so, the probability of we fall in this problem is very high.

Can this problem be mitigated? The answer is yes. Generally if we buy online we can see others people comments about the good and about the seller, if he inspire confidence or not, and like said above we can always resort to a specialist. What people have to think is that, when a buying occurs exists always a lack of information. So, when they reveal their willing to pay they have to take this in attention for not fall in losses.

José Sousa, No 707

Varian, Hal R. (2010). Intermediate Microeconomics a Modern Approach, 8ª Ed. New York: W. W. Norton & Company.

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Author: studentnovasbe

Master student in Nova Sbe

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