The motivation for this post came recently while I was waiting for one of my regular Morning ABC Radio crosses. I heard that I was to be followed by Joseph Stiglitz.
Now that name may not mean much to most readers. But to the academic paper readers out there, we were about to hear from one of the giants of the economic space.
As background, Mr Stiglitz is an American economist. He is a Professor at the Columbia Business School in New York, and he was awarded the Nobel Prize in Economic Sciences in 2001, along with George Akerlof and Michael Spence. Their analysis of markets with asymmetric information was ground breaking work at the time, and it laid the foundations for understanding how information asymmetry affects market outcomes. Since then he has advised governments globally, represented peak economic bodies and written countless books.
While not specifically relating to financial ratios used within Stockopedia, this piece is a little of the background of Asymmetric Information. I will spare us all the mathematics, though in my view appreciating that there is "better quality" information out there is important accept. That is why a robust framework like StockRanks and their components helps us "block out the noise" and stay focused on the things that matter. Remember if you hear about it today, its probably already too late.
Please feel free to pass this contribution if your eyes glaze over. But do so at your own discretion, because his work challenged the traditional economic assumptions of the time that markets operate efficiently when all participants have equal access to information. A reality many of us already know to be untrue just by investing in the market for an age, Professor Stiglitz just answered it with Mathematics. Just like the other Investing Giants whose shoulders we stand on.
Understanding Asymmetric Information
First step is to know what Asymmetric Information actually is.
Asymmetric information occurs when one party in a transaction possesses more or better information than the other (For example an Analyst with a CEO on their speed-dial). This imbalance can lead to several market inefficiencies, including adverse selection, moral hazard, and signalling issues. Here is an explanation of those inefficiencies.
Adverse Selection: This occurs when buyers and sellers have different information about the quality of a product.…
