Message Font: Serif | Sans-Serif
No. of Recommendations: 0

I don't understand why you think it's about asymmetric economics, happy for you to explain that to me.

Asymmetrics is all about human minds & how they don't always act in a rational way. Economic models that do not make adjustments for asymmetrics are doomed.

My understanding of asymmetric economics is when someone in a transaction knows more than the other and the other party understands and accepts that position

Thats the very basic understanding, asymmetrics is a much wider field.

More specifically, Akerlof showed that informational asymmetries can give rise to adverse selection on markets. Due to imperfect information on the part of lenders or prospective car buyers, borrowers with weak repayment prospects or sellers of low-quality cars crowd out everyone else from the market. Spence demonstrated that under certain conditions, well-informed agents can improve their market outcome by signaling their private information to poorly informed agents. The management of a firm can thus incur the additional tax cost of dividends to signal high profitability. Stiglitz showed that an uninformed agent can sometimes capture the information of a better-informed agent through screening, for example by providing choices from a menu of contracts for a particular transaction. Insurance companies are thus able to divide their clients into risk classes by offering different policies, where lower premiums can be exchanged for a higher deductible.

Harmys answer was all about asymmetric thought ie: he feels that its better to pay the divi cause the company will only waste the extra money.

An early example in the literature concerns dividends. Why do firms pay dividends to their shareholders, knowing full well that they are subject to higher taxes (through double taxation) than capital gains? Retaining the profits within the firm would appear as a cheaper way to favor the shareholders through the capital gains of a higher share price. One possible answer is that dividends can act as a signal for favorable prospects. Firms with "insider information" about high profitability pay dividends because the market interprets this as good news and therefore pays a higher price for the share. The higher share price compensates shareholders for the extra tax they pay on the dividends.

These guys one the Nobel prize for economics in 2001.

Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.