James Mirrlees: The Truth Shall Get You 5 Stars
How do you choose a restaurant?
Do you decide by walking down the street and choosing the first one you see or the one with most appealing smells? Maybe you do your homework beforehand, researching the area and picking the one with the best website or menu. Or maybe you rely solely on recommendation?
The choices are endless. And so are the ways to choose between them. You can spend a lot of time taking all of these considerations into account, trying to find the perfect restaurant. (Alex even wrote an entire piece on the abundance of choices!)
This conundrum highlights an important economic concept, known as asymmetric information. Asymmetric information is when during an exchange, only one of the parties actually knows the true quality of the good. When one person (the buyer or the seller) knows more about the good or service than the other, the sale or purchase might not happen because it might be too risky without knowing enough. Choosing the wrong restaurant could result in an unpleasant evening with a rude waiter or a case of food poisoning if your food isn’t cooked properly.
That’s where Nobel Prize laureate, James Mirrlees, comes in. Mirrlees studied the applications of asymmetric information. He looked at the incentives of each party to understand where the asymmetry lies. Mirrlees sought to find out why buyers and sellers do not possess all the information they need. Specifically, he was interested in the process of how both parties can agree to a deal with imperfect information. If both parties would honestly share their private information (without a gun to their head), they would be able to buy (or sell) the good that most satisfies their needs. For Mirrlees, honesty is in fact the best policy.
Going back to our restaurant example, if you could have access to owners sharing honestly about their restaurants and food and other customers’ opinions, you might be able to avoid the rude waiter and case of food poisoning. Accessing honest information from the owner and other customers might be a way to overcome the asymmetry in the restaurant industry.
Enter Yelp.
Yelp was founded in 2004 to facilitate information sharing among local businesses and customers. A restaurant owner can create an account through Yelp and allow customers to post their honest opinions and pictures of the food and experience. Along with detailed reviews, customers can give a rating out of five stars to describe their overall experience. Yelp averages these ratings giving potential customers a quick idea of how the restaurant is. Four stars, great restaurant. One to two stars, avoid at all costs. Customers can post about whatever details were most important to them from cleanliness to wait staff to the meal itself. Using Yelp as a way to receive honest information about the restaurant might save you from food poisoning.
Yelp has helped reduce asymmetric information by aiding both parties to share information freely and without punishment. The restaurant receives honest feedback from its visitors in hopes of attracting more people through favorable ratings and reviews. By preventing owners or managers from removing unfavorable reviews or low ratings, customers can honestly reveal their opinion to both the restaurant and other potential customers.
Yelp is a real life solution to the asymmetric information problem applying Mirrlees’ suggestion of honest sharing. Through Yelp, customers can avoid low rated restaurants and choose restaurants according to what they value most, whether it be cleanliness, respectfulness of the waitstaff or the quality of the meal. Whatever your determining factor for choosing a restaurant, you can find a restaurant on Yelp that best fits your needs and desires without much time or effort.
Mirrlees did not foresee that his solution would be applied in the restaurant industry, but his work showed that a solution exists for asymmetric information through honest sharing of information. His work distinguished him as an economist and he won the Nobel Prize in 1996. Two years later, he was also knighted, adding Sir to the his already impressive name. He still teaches at Cambridge University, teaching students to follow in his steps by solving economic problems through careful study of incentives.
Yelp is just one way that has made the dining experience more pleasurable through increasing the information available. However, even with Yelp, the restaurant you choose does not always satisfy your palate or the experience is overall unsatisfactory. This is a result of the fact that humans are limited and cannot know everything and have all the information. Unfortunately, uncertainty exists. There are still risks even when information abounds. As Mirrlees closed in his acceptance speech, “It is still a world only imperfectly explored.”
Use Yelp to find a restaurant for tonight. Try to find one that best fits your desires. Even if it didn’t meet all your expectations, thank the waiter, pay your bill, and share your honest opinion. Let the owner know about your experience. By sharing honestly, you help restaurants and other customers overcome the problem of asymmetry!
Give this post 1,000 claps so everyone knows what an amazing writer I am for this blog series….go ahead…be honest.
