This is the second post in a six-post series on impact by ACS Associate Will Nielsen.

Spoiler Alert: To improve our understanding of causality and impact, we face a battle with imperfect information that permeates every aspect of our lives. On top of that, getting better information can be expensive. Identifying information thresholds that trigger changes in ideas and behavior can help guide learning about causality.

Imperfect Information

As is well described in the economic literature (which we all love to read), imperfect information is the primary culprit to our lack of understanding (or misunderstanding) of impact. A secondary culprit is the associated costs of acquiring sufficient relevant information, often referred to as transaction costs.

Externalities and market failures are not what is the matter with the world, nor is it externalities and market failure that prevent us from reestablishing the Garden of Eden here on earth — our sad state of affairs is rather due to positive transaction costs and imperfect information.
— Carl Dahlman, 1979

The issue of imperfect information is multi-faceted. We are faced with a perpetual struggle against misinformation, incomplete information, out-of-context information, and the obfuscation of information. This struggle defines our everyday life (If you’re not struggling with this, congrats, you’ve attained enlightenment, please help the rest of us. Alternatively, congrats—ignorance is bliss). Thus, we must focus more effort on information, working to translate the messages we receive into a practical description of our condition.

To achieve the desired level of understanding we would need perfect information. But, of course, the reality of perfect information’s existence is only in the form of a thought experiment: an imaginary, fantastical, unrealized state of affairs. This, however, does not mean a more complete understanding of the status quo should not be pursued. We must develop ways to improve our information, make it more perfect, more encompassing, more cross-cutting, more widely understandable, more readily actionable, and more broadly accepted.

Let’s dive into an example. Due to imperfect and asymmetric information (i.e., different parties have different amounts of information), traditional markets tend towards markets of lemons. Lemon being the term used to describe a poor-quality product, originally that used car we are all terrified of buying. The market of lemons as described by George Akerlof, Nobel Prize winner in Economics, is a market that occurs when consumers cannot distinguish a quality product from a lemon and only one price exists in the market (e.g., good and lemon cars cost the same). Thus, the price will be driven down and high-quality products will eventually leave the market, leaving nothing but lemons. To expand this concept more generally, lemons are not just products and services, but also can represent a company, government program, or an entire sector.

In the case of a company, the problem is we often cannot distinguish the lemon companies from the quality companies due to the imperfect information on (and understanding of) how a company’s impacts affect us. Efforts in Corporate Social Responsibility (CSR) reporting and a variety of certification efforts (such as B Corp) are designed to help overcome this. But, many CSR reports and certification programs are optional and are often used as marketing tools to highlight how amazing and considerate companies are.

Still, simply knowing about the existence of an externality, no matter the size of its impact, can be enough to help resolve externalities—in some cases. For example, knowing solely whether an impact is positive or negative. Overcoming some threshold of imperfect information, which will vary from party to party, can allow affected parties to change their behavior or the behavior of others.

As information improves, the connections within society and economies become more apparent, and this is our subject for Part 3.