Asymmetric Information
This is a situation where one person in a party has more information than the other person.
Examples would be:
- A seller on eBay is selling an item, they have more information on the product(s) they are selling than the buyer does.
- A real estate agent has more information on a house that they are listing than the potential buyer does.
- A tenant knows more about what is happening in the apartment than the landlord does.
- A congressman knows more about the inner workings on Washington, D.C. politics than the constituents do.
There are definite instances where, in any of the above scenarios, that information can be used for malicious or greedy intentions. Say for example: you want to sell your car that has been in several accidents so instead of selling it to a dealer, who is more likely to run a background check on the car history, you try to sell it privately to a more uninformed consumer. This is known as adverse (unfavorable) selection.
The book also used the example of health insurance. The person that needs insuring knows more about their health than the actual insurance company so they may be tempted to fudge information about themselves so that they will be able to get coverage. Maybe they say that they don't smoke or that they weigh less than they do so they will not have to pay higher premiums.
Behavioral Economics
This type of economics deals with decisions that people make from a psychological standpoint.
The sections include:
- People Aren't Always Rational
- People Care About Fairness
- People Are Inconsistent over Time
Being a former psychology major I can definitely see how behavior affects economical decisions in their life. So many people carry a large amount of debt due to their sense of "immediate gratification", the "I have to have it now, I can't wait!" attitude. I bet a lot of the time people just buy things to buy...you've seen the show "Hoarders" right? Those people are the epitome of shopping to satisfy an emotional emptiness, mask painful situations from the past, fulfill a part of themselves that seems unfulfilled, or to control something (like spending) when they feel so out of control in other areas of their lives. Yes, people are irrational and are very inconsistent. They do not think about their future and they definitely don't plan for it very well.
I am a big Dave Ramsey fan. Dave Ramsey is a financial author, radio host and money motivational speaker. He has a saying that goes something like this: "Live like no other now so you can live like no other later." By this he means scrape, save and pay off debt and live frugally now so that by the time you retire you are retiring comfortably without having to worry about your finances in your "golden years." I have slowly incorporated some of his ideas into my financial repertoire, paying off debt, putting more money away in retirement funds, saving for my son's college education and forgoing certain luxuries like vacations, a new car, new clothes...anything that would seem frivolous. I'm not perfect, I do splurge every now and then. But planning for the future now will help me and my family make more rational, fair and consistent decisions...at least I hope so!
Author's Note: This will be my last post for this Microeconomics class. I have really enjoyed using this blog as a way for me to express my thoughts on the reading material on the book "Principles of Microeconomics, 6th ed." by N. Gregory Mankiw. I wanted to say a huge "Thank You" to my professor at CMC Lisa Cheney-Steen!
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