Eli5: Asymmetric information what is it and why is it important?



Eli5: Asymmetric information what is it and why is it important?

In: Economics

You sit down to play a game of chess. You know everything your opponent knows, and they know everything you know, about the state of the game. That’s *symmetric* information. Chess also happens to be a game of *perfect* information, because you both know everything there is to know about the state of the game.

Now, imagine we have a new form of chess. One square, at random, is a land mine trapped by a non-player (say, a judge in a tournament, or it’s chosen at random). Neither player knows where it is, and both know when it blows up. This game still has *symmetric* information, but the information is no longer *perfect* (because the players don’t know where the mine is). Both players are still basically playing a game of strategy on the board, not a psychological one with one another (except perhaps in ways the other player might cue things they “know” but haven’t noticed yet).

Now imagine that the player with the black pieces gets to set the land mine, and the player with the white pieces doesn’t know where it is. Now the information is *asymmetric*: black has information white does not. Black can play mind games with white by conspicuously avoiding certain squares, while white can keep track of where black moves to narrow down the information available to them. White may have a guaranteed win but be unsure if it will be disrupted by the secret land mine. And so on. Now white’s understanding *of black’s psychology* becomes very important – is black bluffing? double-bluffing? triple-bluffing?