What is the "asymmetry of information" that creates the difficulty of investing? - Tokyo Research Institute - - Tokyo Institute of Comprehensive Research Institute's Selected Stock Investment Recommendation - Navi+ - GogoJungle | Auto Trading - Market Analysis

Hello everyone!

We are the Tokyo General Research Institute staff team!

Haven't you all experienced something like this?

You were told by one investment advisor to buy a certain stock, but another place said you must not buy it…

Which one should you trust…?

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Today’s article“information asymmetry”will be explained in an easy-to-understand manner.

Understanding this well will help you decide which investment advisor to trust.

Information asymmetry?

Information asymmetry is“where, when conducting a transaction, there is a disparity between the information each party possesses about the goods, etc.”that can be described succinctly.

It may be a little hard to understand, so let’s look at a concrete example.

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A person (Person A) is trying to sell a car they have used for 10 years to a used car dealership (Store B).

At this time, A wants to sell as high as possible and deliberately does not disclose several defects (such as hard-to-see interior scratches or occasional engine starting issues).

Store B discovers these defects after purchase, but it is already too late.

When selling, they could only set a price lower than originally planned.

In this example, because there is a decisive difference in the amount and quality of information held by the seller (A) and the buyer (Store B), a poorer-quality product ends up on the market at a price higher than its true value.

This phenomenon“lemon market”is often used as an example of how information asymmetry distorts market functioning.

(By the way, the word “lemon” originates from the United States where low-quality used cars are slangily called lemons because their outer shell is thick and you can’t judge the inside from the outside. Conversely, high-quality used cars are said to be called peaches. A humorous naming indeed!)

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Thus, in transactions, the state where there is an information gap between the seller and the buyer is very difficult to avoid.

Moreover, as a result,the party that does not have the information is likely to suffer significant disadvantages.

And this is the same in investing.

For example, stock investment.

The company issuing the stock has detailed knowledge about its own information.

Therefore, it can more easily make accurate forecasts about future performance.

On the other hand, the information that investors can gather is limited.

Hence, there is a higher chance of making incorrect judgments.

What to be careful about in investing?

So, how should investors deal with this “information asymmetry”?

First, gather as much information as possible.

Investing based on more information leads to safer and higher-profit investments.

This blog also contributes to reducing information asymmetry in the investment market!

Another approach is to accept risk and make investment decisions that correspond to that risk.

No matter how much research you do, you cannot completely eliminate information asymmetry.

That’s why, based on the collected information, measure the risk,and decide for yourself whether you should take that risk.

That’s all for today!

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