Perfect information

From CEOpedia | Management online

Game theory in simply way shows what perfect information is about. If all players know all earlier turns and decisions of all other then, as things stand, they have perfect information. If players are not observable so decisions made by others are not known players deal with imperfect information. A good example would be chess, the game uses perfect information. In economics, this occurrence is named as hidden action, which have an effect in suboptimal outcomes in comparison with phenomenon with perfect information[1].

Perfect information in practice means that all buyers have all information about all products. Perfect information is needed to realise the effects of static economic efficiency, as players need to know about the availability of goods, resources, processes, and technology and they must know what prices they have, how to use them in the best way and achieve the most effective deals and trades. Market theory preconceive accurate information easily provided to others[2].

Perfect information is not compact with maximizing players, some of them decide to conceal or deform information in their interest. It is hard to distort or withhold information in case of the true perfect market because this type of market ensures high standards of display of products to customers and sellers. In reality, players can hide or deform information, because the accurate information is not divulged by the good[3].

Causes of imperfect information

Roger Mann in his book "Antimarket Economics: Blind Logic, Better Science, and the Diversity of Economic Competition" presents four basic reasons why information is imperfect[4]:

  1. "The information cannot be known at the time the decision to produce or buy must be made (the temporal problem)."
  2. "The information is not revealed by the good or process (the revelation problem)."
  3. "The information is a private, rival good developed and protected as property that is withheld (the property problem)".
  4. "Information can be and is made available to some selected players before others (the insider problem)".

Perfect information in management

Perfect information is occurring when the future can be accurately envisaged, in other words, it is a 100 percent foreseeable fact[5]. The value of perfect information is described in the book "ACCA Approved - F5 Performance Management (September 2017 to June 2018 exams)" as the difference between[6]:

  • "the EV of profit with perfect information";
  • "the EV of profit without perfect information",

where "EV" is the expected value.

Imperfect information is not believable, in 100 percent credible, but is useful, because it gives more cognizance than no information whatsoever[7].

Mother wit implies that the value of imperfect information is always less compared with the value of perfect information. The singular exception occurs when the value of perfect and imperfect information is equated to zero. This would take place when the new, added information would not alter the decision[8].

To make perfect resolutions, we need to have perfect information, only then we can have perfect control and command. Perfection cannot be correlated with management, because "perfection for management never has existed and never will. We are fighting too much complexity, too much change and too much uncertainty about the past, present, and future[9]". We usually own incomplete, erroneous information, which is out of date, not actual. This provides some apparent consequences for management. Imperfect decisions are made when we operate with imperfect information. Management needs to learn how to last with imperfection. The biggest catch is to look for perfect information, this aspect is eventually self-destructive. Impossibility is to find out all there is to know about the trade. The marginal costs and gains make that additional information is uneconomic, even with the progress in technology[10].

Examples of Perfect information

  • Chess: Chess is a board game played by two players. It is a perfect information game because both players can see the board at all times and can make decisions based on the present state of the board. Both players know the exact position of all pieces and the possible moves available to them.
  • Poker: Poker is a card game played with a deck of 52 cards. It is a perfect information game because all players can see the cards in play at any time. All players know exactly which cards are in play and the possible moves available to them.
  • Bridge: Bridge is a card game played with a deck of 52 cards. It is a perfect information game because all players can see the cards in play at any time. All players know exactly which cards are in play and the possible moves available to them.
  • Go: Go is a two-player strategy board game. It is a perfect information game because both players can see the board at all times and can make decisions based on the present state of the board. Both players know the exact position of all pieces and the possible moves available to them.

Advantages of Perfect information

Perfect information is advantageous in game theory because it allows players to make well-informed decisions. It provides a clear view of the game and helps players plan ahead, allowing them to make decisions that are most likely to result in a positive outcome. Some of the main advantages of perfect information include:

  • The ability to make more accurate decisions: Knowing all the information about the game, including the decisions that have been made by all players, allows players to make more informed decisions about their own actions and increases their chances of success.
  • The ability to anticipate opposing moves: With perfect information, players can anticipate their opponents’ moves and plan their own accordingly. This helps to reduce the risk of being surprised or blindsided by an unexpected move.
  • The ability to plan ahead: With perfect information, players can plan ahead, looking at the big picture and strategizing their moves to create the most beneficial outcome.
  • The ability to reduce uncertainty: Perfect information eliminates much of the uncertainty associated with game theory and helps players make decisions with greater confidence.

Limitations of Perfect information

The limitations of perfect information are:

  • Perfect information is often unrealistic in many real-world situations. Even in a game like chess, there are elements of uncertainty that can influence the outcome. For example, a player may not know their opponent's exact strategy, or may make mistakes due to fatigue. Thus, perfect information alone cannot guarantee an optimal result.
  • Perfect information also assumes that all players have equal access to the same information. In reality, the players may not have the same level of knowledge, resources or access to information. This can lead to an unequal playing field and potentially suboptimal outcomes.
  • Perfect information also assumes that all players are rational and make optimal decisions based on the available information. In reality, players may make suboptimal decisions due to emotional or psychological factors, or due to a lack of understanding of the consequences of their decisions.
  • Finally, perfect information does not take into account the unpredictability of external factors, such as weather, economic conditions or political events, which can have an impact on the outcome of the game.

Other approaches related to Perfect information

In addition to game theory, there are several other approaches related to perfect information. These include:

  • Bayesian decision theory - this approach uses mathematical models to make decisions based on given information. It is based on the belief that each decision has an associated probability and one can use this probability to make an informed decision.
  • Decision trees - this approach uses a tree-like structure to represent the different possible outcomes of a decision. It involves assigning probabilities to each outcome and then using this information to make an informed decision.
  • Utility theory - this approach uses mathematical models to represent the value of different outcomes and then uses this information to make an informed decision.

In summary, perfect information is used in game theory and several other approaches, such as Bayesian decision theory, decision trees and utility theory. These approaches all use mathematical models to make decisions based on given information.

Footnotes

  1. ↑ T. Weitzel, (2003), p. 58
  2. ↑ R. Mann, (1996), p. 32
  3. ↑ R. Mann, (1996), p. 32
  4. ↑ R. Mann, (1996), p. 40-41
  5. ↑ Becker Professional Education, (2017), p. 3104
  6. ↑ Becker Professional Education, (2017), p. 3104
  7. ↑ Becker Professional Education, (2017), p. 3104
  8. ↑ Becker Professional Education, (2017), p. 3104
  9. ↑ J. Owen, (2003), p. 67-68
  10. ↑ J. Owen, (2003), p. 67-68


Perfect information — recommended articles
Continuation Pattern — Look-Ahead Bias — Capital market theories — Golden hammer — Market dynamics — Strategic driver — Adaptive expectations — Impact of information on decision-making — Economic risk

References

Author: Kinga Podlasek

Retrieved from "https://ceopedia.org/index.php?title=Perfect_information&oldid=95172"