What is ‘perfect information’?

Perfect information is when we know everything we need to make the best choice. A lot times when economists build theories or models of the economy, they assume everyone has perfect information. But there are a lot of reasons why we might not have perfect, or even decent, information.

One big problem with information is that it takes time and energy to gather. When you buy something big like a computer or a car, you probably check out the prices of different options before making a final decision. But when you buy milk at the grocery store, you probably don’t check every store in town to make sure you’re getting the best deal. You might not even bother to look at the price look at the price of the milk you’re buying!

In other cases, someone else might have information that they can’t (or won’t) give to you. Economists call this asymmetric information. It could be that the person or organisation is purposefully keeping some things hidden—a business might hide information about how quickly their product will break down or how risky it is. But there is also some information that is almost impossible to reliably transmit—how can you prove to a potential boss that you’ll be a good worker before they hire you?

Finally, some things are simply unknowable—economists call this fundamental uncertainty. A business might be able to have a good idea what oil prices or interest rates will be in the next few months, or even next few years, but over very long periods it’s basically impossible to say for sure. Things like new technologies, natural disasters, economic crashes and wars can come out of nowhere to change really big things about the economy. Imagine trying to guess how valuable the internet would be when it was first invented. For some big questions there are just too many moving parts for people to make remotely informed decisions.

Economists understand that perfect information isn’t always an accurate assumption. But ignoring information problems can make it easier to look at other parts of the economy. The idea of ‘perfect information’ also makes it easier for economists to identify when information really matters: if real world markets aren’t working the way ‘perfect information’ markets should, there might be a problem with who knows what.

Some economists take a different approach and start by assuming imperfect information from the get go—that’s how bounded rationality theory does it.