Information Asymmetry and Umbrellas

FT Alphaville's Izabella Kaminska at her personal blog, Dizzynomics:

I’m a little obsessed with information efficiency paradox theory. Probably because I am even more obsessed with the idea of purposeful information asymmetry.

The Stiglitz paper on HFT and information asymmetry makes for very interesting reading in that regard.
As it happens, I’ve been thinking about many of the same consequences, the only difference is that I’ve been referring to it as the “end of arbitrage” phenomenon.

Stiglitz takes this further by pointing out that if there is no information arbitrage, there are meaningful consequences for worthwhile economic allocation and information discovery incentives.

In short, in a perfect world where all information is known, nobody has an incentive to do anything and we all converge to the Borg and/or a stagnated blob.

Before I get to the consequences of this for encryption, and information channels more generally, I would like to point out my umbrella coincidence.

Stiglitz uses umbrellas thusly to explain the difference between useful markets and useless markets:

If there is one umbrella, and there is a 50/50 chance of rain, if neither of us has any information, the price will reflect that risk. One of us will get the umbrella. If it rains, that person will be the winner. If it does not, the other person will be the winner. Ex ante, each has the same expected utility. If, now, one person finds out whether it’s going to rain, then he is always the winner: he gets the umbrella if and only if it rains. If the other person does not fully understand what is going on, he is always the loser. There is a large redistributive effect associated with the information (in particular, with the information asymmetry), but no real social benefit. And if it cost anything to gather the information, then there is a net social cost.

Umbrellas are used above to demonstrate how the whole phenomenon of purposeful asymmetry and purposeful discovery of that information (by an HFT) is tantamount to a socially useless activity. It’s just a game....MUCH MORE