Another day, another Economist attempts to unsee the Information Matrix.  Their attempts to unsee would be amusing if we treated Economists like astrologers.  Unfortunately, we don’t.  We let Economists influence government policies that impact all of us.  As a result, the attempts to unsee are nothing short of malpractice.

The Information Matrix is an example of an idea that is both useful and, all modesty aside, brilliant.

Information Matrix

It explains the design of the global financial system.

The intent of the financial system’s design is to move the vast majority of investments from Wall Street’s preferred Blind Betting quadrant into the Perfect Information quadrant.

Moving investments into the Perfect Information quadrant makes sense on a number of levels.  First, the Perfect Information quadrant is where all the theories developed under standard economics about how the market optimally allocates resources work.  Second, it allowed investors to Trust, but Verify the story Wall Street tells them.

Keep in mind, behavioral economics’ observation people like a good story operates in both the Perfect Information and Blind Betting quadrant.  The key difference between the two quadrants is in the Perfect Information quadrant the story can be verified and in the Blind Betting quadrant the absence of the necessary information means the story cannot be verified.

Whether the story can be verified or not results in a vastly different response when Wall Street’s valuation story is called into doubt.  In the Perfect Information quadrant, the story can be verified and the doubt dismissed.  In the Blind Betting quadrant, the story cannot be verified.  Not only is the doubt not dismissed, but the logical follow-up question arises:  is the investment worth anything?  This too cannot be verified.  Investors recognize this and, as behavioral economics suggests, naturally panic.  The result is a “run” to get their money back.

Behavioral economics allows us to understand the classic financial crisis panic.  The Information Matrix framework shows why the financial crises always start in the Blind Betting quadrant.  Together they explain why if you want to minimize the chances of another financial crisis, you minimize the size of the Blind Betting quadrant.

But the Information Matrix does more than this.

From an economist’s perspective, it shows information asymmetry is an interesting market imperfection, but blind betting is a much more important market imperfection (after all, no reason to think blind betting yields the same optimal allocation of resources as informed decision making).

From a non-economist’s perspective, the Information Matrix lends itself to useful applications like the Transparency Label Initiative.  The Initiative in turn allows us to treat opacity as an asset class.

I could go on, but I think I have made the point of just how useful the Information Matrix is and how it is a game changer for the Economics/Finance profession.  It is its usefulness that is the reason Economists engage in malpractice trying to unsee it.

Examples of this malpractice behavior include:

1. Insisting the Information Matrix appear in a prestigious Economic journal before they will consider it [a non-starter as these journals wouldn’t consider an article on the Information Matrix even though it is a game changer];
2. PhD defense syndrome (ongoing rejection of the Information Matrix because acknowledging it would invalidate either an article or dissertation the Economist previously wrote).