The Hindu Business Line : Why we behave like Groucho

The other day, we took our daughter shopping. Her attitude at a certain ready-to-wear shop was intriguing. She refused to try out anything that we selected. Her attitude was simple: If you want to buy me something, I do not want it! The way she reacted reminded us of Groucho Marx. The famous Hollywood comedian once dashed off a telegram to a club to which he belonged: “Please accept my resignation. I do not want to belong to any club that will accept me as a member”. Groucho’s behaviour has a lesson for us in economics. We behave like that when we transact with sellers who are keen on peddling their wares to us. This behaviour could be explained by “asymmetric information.” What is that?

Picture this. You are walking down a busy street that has sellers flashing their wares on the sidewalk. A seller enquires if you are interested in buying an almost brand-new i-Pod for 75 per cent of the retail price. How will you react? If you are a typical consumer, you wonder if the i-Pod is defective.

Asymmetric information

You are apprehensive about buying the i-Pod off the street. You may be willing to buy a new one from a store for a full price with a warranty; for warranty is a signal from the manufacturer that the product is of good quality. The reason you do this is because of what economists call “asymmetric information”; you do not have as much information about the quality of the product as the seller. One party to the transaction has more information than the other. This behaviour, observed in the used-car market, prompted George Akerlof to write a seminal paper “Market for Lemons” in 1960s. It has since spawned off research in the area of asymmetric information and won him a Nobel Prize in 2001. While Groucho Marx may have, indeed, reacted the way he did because of asymmetric information, it may be hard to argue that our three-year old daughter behaved the way she did for the same reason. Asymmetry is still a long way off for her!

(The author is a Chennai-based financial analyst.)

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