The Role of Information in Decision Making
Edward Shinnick (Univserity College Cork, Ireland) and Geraldine Ryan (Univserity College Cork, Ireland)
Copyright © 2008.
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The advent of the World Wide Web and other communication technologies has significantly changed how we access information, the amount of information available to us, and the cost of collecting that information. Individuals and businesses alike collect and interpret information in their decision-making activities and use this information for personal or economic gain. Underlying this description is the assumption that the information we need exists, is freely available, and easy to interpret. Yet in many instances this may not be the case at all. In some situations, information may be hidden, costly to assimilate, or difficult to interpret to ones own circumstances. In addition, two individuals who look at the same information can reach different conclusions as to its value. One person may see it as just a collection of numbers, another sees a market opportunity. In the latter case, information is used in an entrepreneurial way to create a business opportunity. Advances in technology have created opportunities to do this by creating information systems that can support business decision-making activities. Such decision support systems are playing an increasingly important role in determining not only the efficiency of businesses but also as business opportunities themselves through the design and implementation of such systems for other markets and businesses. However all is not easy as it may first seem. Quality decision making and effective decision support systems require high quality information. The implicit assumption in talking about decision support systems is that the required information is always available. It is somewhere “out there” and must just be collated to make use of it. However, very often this is not the case. Information that is scarce or inaccessible is often more valuable and can be the very reason for many firm’s existence. The importance for firms to process information to do with its business environment on issues such as, market trends, events, competitors, and technological innovations relevant to their success is prevalent in the management and IS literature.1 The theme of this article is to analyse the role information plays in managerial decision making at individual, group, and firm level from an economics perspective. We argue that access to information is essential for effective decision making and look at problems associated with insufficient information; the effects that such information deficits have in shaping and designing markets are then explored. We start by exploring the nature of information and the issue of asymmetric information. We examine the different solutions put forward to address information deficits, such as advertising, licensing, and regulation. Finally we conclude by outlining likely future research in markets with information deficits.
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Key Terms in this Chapter
Principal: Principal is a person who authorises an agent to act to create a relationship (usually of a legal nature) with a third party.
Agent: Agent is a person that acts on behalf of a principal.
Moral Hazard: Moral hazard concerns the problem of hidden effort, which can result in increased risk of a negative outcome because the person who caused the problem does not suffer the full cost of that lack of effort.
Transaction Cost: Transaction costs is a cost incurred when undertaking an exchange in the marketplace.
Public Interest: Public interest refers to instances that are for the “common good” and is used to justify government involvement in a market economy.
Principal-Agent Problem: Principle-agent problem concerns the difficulties that can arise when there exists incomplete or asymmetric information between a principal and an agent. Attempts are then made to align the interests of the agent with those of the principal.
Screening: Screening is a mechanism where an uninformed agent can obtain the hidden information of another agent as a way to combat the adverse selection problem.
Regulation: A regulation is a rule or restriction instigated by governments or their administrative agencies, with the force of law supporting its enforcement.
Asymmetric Information: Asymmetric information occurs when one party to a transaction has more information than another and can use this information for its own advantage.
Adverse Selection: Adverse selection concerns the problem of hidden information that can adversely affect the efficiency of a market, such as in insurance where unhealthy people are more likely to seek health insurance.
Market Failure: Market failure are situations where markets do not operate efficiently in the organisation, production, or allocation of goods and services to consumers.
Risk Equalisation: Risk equalisation is a scheme by which an insurance firm(s) is compensated for taking on more risky consumers by another insurance firm(s) which has less risky consumers.
Signalling: Signalling is a process by which one agent conveys information about itself to another party.
Intellectual Property: Intellectual property is a term used to refer to the object of a variety of laws that provide exclusive ownership rights to certain parties.