Explore the intriguing concept of asymmetric information in finance through this comprehensive lecture. Delve into how unequal access to information can impact financial transactions, from buying used cars to managing companies. Learn about net present value, discount rates, and the principal-agent problem. Discover the fascinating paradox of how more information can sometimes leave you worse off. Examine real-world examples of information asymmetry, including Akerlof's 'Market for Lemons' theory. Investigate how asymmetric information affects labor markets, education, and business strategies. Understand concepts like adverse selection, moral hazard, and screening techniques. Analyze how industries like airlines and banks leverage information asymmetry. Engage with a thought-provoking Q&A session that further illuminates this complex topic in finance.
Overview
Syllabus
Introduction
What is Net Present Value?
What is the right discount rate?
How much should you borrow?
What is the value of being able to change your mind?
We assume everyone has the same information
Why companies should be managed in the shareholders' interest
Contracting theory, how it affects shareholders
The principal-agent problem
What is an ideal trade?
Problems caused by information asymmetry
Examples of information asymmetry
Akerlof's paper 'The Market for Lemons'
Adverse selection and moral hazard
How to advertise for the next James Bond
How asymmetric information affects the labour market
Education makes you more employable
Should you work hard or 'work smart'?
Can getting angry help you in business?
How screening helps you get the information you're missing
How airlines get you to pay more for business class
Why banks are reluctant to give out loans
Who is most hurt by asymmetric information? + conclusion
Q&A session
Taught by
Gresham College
