The famous adage “a little knowledge is a dangerous thing” applies to PhD Economists in spades.  And nowhere is this more true than when they start talking about the financial markets and the global financial system.

I’ll use the Information Matrix to illustrate this fact.

Information Matrix

In Econ 101, students are taught about markets where it is assumed there is Perfect Information.  Buyers and sellers have access to all the information they need to make a fully informed decision.

Towards the end of Econ 101, the idea of information asymmetry is introduced.  Students are introduced to the Lemon Problem where the seller has access to information the buyer does not have and this information is necessary for the buyer to make a fully informed decision.  This puts the seller in a position where they can take advantage of the buyer.

Occasionally in Econ 101, but definitely in Econ graduate school, information asymmetry is more fully studied.  This includes the introduction of the Antique Dealer Problem where the buyer has access to information the seller does not have and this information is necessary for the seller to make a fully informed decision.  This puts the buyer in a position where they can take advantage of the seller.

And this is as far as the Economics profession has gotten since the ideas of information asymmetry were introduced 4 decades ago.

Unfortunately, these three quadrants of the Information Matrix are inadequate for understanding important issues like why the global financial system is designed the way it is or where financial crises come from.  This is true regardless of how many courses the Economic PhD has taken or how many papers they have published in academic journals.

In the absence of any understanding of the Blind Betting quadrant and its existence, PhD Economists commenting on the financial markets and the global financial system simply demonstrate how dangerous a little knowledge of the other three quadrants of the Information Matrix is.