Saturday, December 15, 2007
A Potentially Profitable Investment
In Principles of Microeconomics, we have been discussing the concept of rational ignorance. Rational ignorance is the idea that at some point, it is not profitable for people to acquire more information when making a decision. This phenomenon often manifests itself among voters, who vote on economic policy without any formal economic training or nuclear policy without having studied nuclear physics.
In another class, which ended up being a sort of "history of economic thought," we spent a long period discussing personal and impersonal transactions in markets. As markets have grown and the economy has become more complex (as we have specialized and industrialized), more of our transactions have become impersonal. They are based not on trust or knowledge of a person, but on assumptions that they would not be in business if they were not qualified. An important aspect of markets, then, is feedback. Feedback allows consumers to determine how previous customers felt about a business and helped inform their decisions when embarking in these transactions.
So, to tie it all together: We are in a market of largely impersonal transactions. We base our decisions on who to conduct business with largely on feedback, because it is rational for us to be ignorant about different subjects. Consider, for example, hiring a mechanic to work on your car. You face the problem of lack of knowledge about your car, which is why you hired a mechanic in the first place. You therefore cannot know whether your car truly needs the $1,000 repair for a new catalytic converter or whether you are being ripped off. Which mechanic you hire, therefore, is very important. Feedback from others can be very important when hiring a mechanic - however, there is no collective database of information on various mechanics.
We have the means of creating such a database. Look no further than RateMyProfessors.Com, a website designed for college students to take advantage of other students' experiences with a professor and better inform their decisions of whose classes to take. I am curious as to why there are no similar sites for skilled labor. Do you think such a site would be useful? Have they not appeared because the people hiring mechanics, electricians and plumbers are not yet tech-savvy? If so, how long until they appear?
Assuming, as the Freakonomists do, that the Coase theorem holds for online domain names, maybe someone ought to buy up RateMyMechanic.Com now, to sell in a couple years at a profit when someone wants to start up this website.
Compared with the totality of knowledge which is continually utilized in the evolution of a dynamic civilization, the difference between the knowledge that the wisest and that which the most ignorant individual can deliberately employ is comparatively insignificant. ~Fredrich Hayek in The Constitution of Liberty