Being uninformed may not be a bad thing

At most time, we love to have more information and we always feel information available to us is never enough. It is true that we do not often have the access to perfect information and imperfect information often affects our decision making and makes our decisions less perfect. However, there could be I think some cases that we are actually better off without perfect information.

Firstly, we have to admit that we are not able to execute all information perfectly as we are constrained by time and tools available. Therefore, when we are having too much information to analyse, it is likely to see that we try to focus on certain categories of information but ignore other categories of information; however, the categories that we focus on are not necessary to be selected rationally. Sometimes we tend to focus on the information that is surprising, for example, due to our loss aversion, we may focus on the negative information rather than the positive information. Secondly, we are not always necessarily right to make correct analysis on the information available to us. Once we cannot get correct answers from our analysis, we are not better off with more information, as we just do not get correct answers anyway. Thirdly, information can affect our emotions. Usually when studying economics, we exclude the case of people making decisions when they are not mentally stable. However, though we usually exclude this case, it happens to our life. When we are not mentally stable, we are not likely to make reasonable decisions under such circumstance.

When we are receiving more information, information has to be analysed by ourselves. The process of analysing information always involves with risk, when we are doing more analysis, the probability of getting wrong is increasing with the amount of information we are analysing. In addition, to analyse more information, the tools and theoretical frameworks required have to be more advanced.

How do people adjust their utility judgement according to market prices?

Previously I talked about people could have incentives to borrow others’ opinions to adjust their utility judgement and one of the sources would be signals sent in the form of market prices. Market prices would definitely be one of the most significant and effective signals made by the market. Today I want to discuss about how people adjust their utility judgement according to market prices and what are the difficulties of adjusting utility judgement.

For people to adjust their utility judgement, price has several functions. Firstly, price is determined by the supply and demand relationship in the market, so people can use price changes to reflect the moves of either supply side or demand side. Secondly, even in a imperfectly competitive market, price can reflect suppliers’ target consumer groups, so from price, people can know if the product is designed for them. Thirdly, price in the resale market can show how much people can get out of a product they have bought once they decide they do not need the product any more.

However, price is a reflection of all market information; therefore, though individuals may have a sense of what the general market think about the product, individuals do not how different their own individual preferences are from the general market’s preference. Secondly, nowadays, there are many oligopoly markets where suppliers have more power of determining the prices, prices set by suppliers can manipulate people’s opinions, especially when combining use of advertising. Thirdly, once every one adjusts their individual utilities according to others’, a price increase can lead to a multiple effect in terms of people’s judgement of utility. As one individual increases his/her utility expectation, others will also increase accordingly, and this increase will repeat and accumulate and create multiply effects.

Wage adjustment according to inflation may help to improve social equality

I think if employers are made to adjust their employees’ wages according to inflation annually, it will be helpful to improve the social equality. This thought has several reasons.

Firstly, the majority of the population (excluding those who have not finished their education or have retired), especially in developed or developing countries, are employed by others. When their incomes can be adjusted according to inflation, if they stay with the same jobs, their lives will not be affected by inflation. Secondly, it also adds more inflationary pressure in the economy, which could encourage more consumption. When there is more consumption, it can create more jobs, so the unemployment rate could be reduced. Thirdly, the proportions of ordinary people’s wealth that are used for consumption are higher than the proportions of super wealthy people’s wealth that are used for consumption, this implies when ordinary people are given more wealth, it will increase consumption more effectively and wealth is more likely to move across different classes of people. Fourthly, as employees’ wealth is dependent of their incomes, when their incomes change according to inflation, they will be benefited from this policy, this may help to close the wealth gap between the ordinary people and the super wealthy people. Fifthly, the super wealthy people’s wealth may be diluted by high inflation in the economy, this also forces them to spend more, so the wealth from the top wealthy class will be distributed to other classes among the society.

Therefore, if employees’ incomes can be lifted according to inflation, it can contribute more to the economy and further close the wealth gap between the top wealthy class and the ordinary people.

What are the difficulties of interacting with each other when making utility judgement?

Yesterday I talked about why people would like to interact with each other when making utility judgement. My conclusion was people should interact with each other as they do not have access to perfect information. Today I want to explain the difficulties individuals may face when trying to improve their information and utility judgement by interacting with each other.

Between individuals, information asymmetry does exist as well. Because of the existence of information asymmetry, people do not tend to know how the others make their own utility judgement; therefore, when borrowing others’ utility judgement, the judgement may not fit in individuals’ own cases. In addition, due to the existence of information asymmetry, the signals about others’ utility judgement are not reliable or useful as others may also make the judgement based on similar circumstances.

Secondly, besides information asymmetry, different individuals have different preferences, so only observing market prices as signals are not going to be reliable. Thirdly, receiving information from suppliers always will make customers be manipulated by suppliers, as they have put lots of resources on researching on how to manipulate customers’ behaviour. Fourthly, even after interacting with each other, individuals may still be uncertain about utility judgement, so the effectiveness of interacting with other is doubtable in terms of individuals making their utility judgement.