Monday, January 11, 2010

On not knowing

People don't know what they want and firms don't know what they have.

As I progress in my Economics education, I assume that the idea of imperfect information will be increasingly incorporated into the models I study. But I wonder whether this idea—that no one knows how much satisfaction a product or service will produce—will come into play.

Obviously, people guess and firms guess, and their guesses intersect at some sort of equilibrium. But when markets are small, say, when one big company wants to buy another one, the guesses can be disastrously wrong.

Individuals make these kind of guesses all the time, and they can be just as wrong. But they can probably improve their chances of getting something that ultimately delivers high satisfaction if they use the collective experience of the market. So they buy what everyone else is buying.

It's not a bad strategy if you don't know what you want and you don't know what you'll get. But that's how you wind up eating at McDonald's wearing Gap jeans and driving a Camry. Or, for that matter, eating at Nobu wearing Prada and driving an S500.

So the key, I think, and this is I'm sure totally obvious to everyone else but me, is to know what you want and know what you'll get.

What do you want? I'm going to give that question some thought.

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