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Information cost

Over dinner, I exclaimed to my economist friend, "How can I stop optimising? How can I stop searching for a better deal?"

He replied, "Beware of information cost. Satisfice."

Most people aren't so picky. Given enough time, I want the best of all worlds. And in the process of searching, I forget that there is a price to pay. There is the cost of search. After a point, each incremental value of the additional information I gain from spending that unit of time searching decreases. In economics, it's known as the marginal utility of information. Utility = your value.

In liquid markets buyers and sellers can find each other quickly. In efficient markets, price signals reflect the value of whatever is sold or bought at that time. The property market in London is very efficient though not necessarily liquid, for transaction costs are high. But in the travel industry, it is both liquid and efficient. Intermediaries such as travel agents and booking agents on or off line help make it so.

Satisfice is about finding something good enough and sticking with it. Optimise is about finding the best one. To satisfice, you need to be satisfied with what you've chosen and not regret. To optimise, you need to give yourself constraints, such as time and budget, otherwise you'll never get there.

How do you recover information cost -- the time and effort you spent in finding something? Or worse, the opportunity cost of search? the time and effort you could have spent on something else instead? For me, it's the satisfaction of knowing that it's time well-spent, either that I've found the best deal or that it wasn't possible.

If it's a frequent activity, then you should be able to learn from it and repeat the process more efficiently each time. If it's a one-off activity, such as buying your first property, it's best to spend time learning about the process.

Unfortunately, we too often jump on the surfing machine, wandering the streets of cyberspace aimlessly, allowing the alternatives to fog up our true values and objectives.

Beware of information cost!

19 March 2002 Tuesday