Opinion 07-05-2018 0

The Market for Lemons

Idea 1: The Paradox of Privacy

Digital currency is nothing new. We have all heard of Bitcoin, seen the ads for eWallets, and probably pondered on the fact that our actual hard-earned Rands are mainly just stored as a series of binary numbers on a system at our preferred bank.

Consider quantitative easing for example – do you think the US government actually printed and fed more cash in to the system? Well, not exactly; closer to the truth is they just added to two zero’s to the fiscus. That simple.

But when did we become data? When did our choices, preferences, likes, dislikes, travel destinations and friends all turn in to sustainable business models? When did we lose our privacy?

Regardless of the answer to those previous questions, that is how things now are, and it has brought a strange consequence along with it – as much as we have issue with our personal information being used, and occasionally exploited, for profit, we do appreciate the many benefits, and the vast number of efficiencies, which are enabled when intelligent use of this information is employed.

So, we are slightly conflicted; we know that we like our privacy, but we also know we like things being as easy as possible. So, maybe, as long as everything someone knows about us is securely stored and used to our benefit, then we are ok with it? (That might just be the millennial in me speaking.)

Idea 2: Information Asymmetry

In one of the most influential economic papers written in the last century, George Akerlof succinctly demonstrated how a market where asymmetric information is present will eventually collapse. In economic terms, asymmetric information exists where one participant in a transaction has more information than another, and uses this information to their advantage.

Akerlof’s example centers around the market for used cars in America, where a buyer never has as much information as the seller. This leads to a risk from the buyer’s perspective that they may end up with a “lemon”, as opposed to a quality second-hand vehicle.

As a result of this situation buyers will drive prices down, as they don’t trust the high-end prices quoted, for fear of those vehicles being lemons. Eventually these top quality second-hand car sellers will leave the market due to them being unable to receive the prices their automotives are worth. If this situation perpetuates then this will lead to complete market failure as the prices will continue to fall and the probability of purchasing a lemon will continue to rise. (If you’d like to have a closer look at this, you can find the complete paper here.)

Connecting the Dots

Well, we now live in a world where we are comfortable with our data being used, so long as it is to our benefit, allows us to get on with our lives and enables better decision making. However, this is still the same world Akerlof wrote of, where trust plays a key role, and where information asymmetry can lead to a complete breakdown of some sort.

In the real world, we, as advisor’s, are generally the buyers in Akerlof’s example, never knowing if we have complete information about our clients. But how can proper advice and insight be provided without this critical component? And, if we are not provided such information, does it not demonstrate a lack of trust?

Part of the solution to addressing information asymmetry is the implementation of various processes, and the utilization of tools to try and mitigate against any risks, to minimize the potential of a poor outcome. The good news is that such tools are available, but are you using them?

Remaining Relevant

Everyone believes that they know their clients better than anyone else, but, since we as humans are cognitively limited to only being able to maintain around 150 stable relationships, is this even possible when considering the size of the average client base?

The answer is obviously no, not without utilising technology to augment ourselves and our practices.

A simple requirement of the adequate serving of clients today is to invest in our businesses for the future, with clients at the core and the ultimate goal being to find information parity in our client relationships – if we had perfect information then the advice and solutions which we could be providing would be exponentially better.

It is therefore critical to start your own digitization process, to disrupt your business model and future-proof your organisation, otherwise you may just find that by the time you get around to it, there will be very little reason to.

Why not automate mundane processes, be accessible 24/7, communicate personally and with relevant information, be at every important event, make sure you remember everything from your last meeting and remain relevant in more than just your client’s financial life – be a real part of their 150.

Its all far more possible, attainable and cost-effective than you may realise – all you need to do is take the first step.


Don’t be a lemon.

By Nicholas Bowman

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