Friday, October 31, 2008

Imperfect information

A couple of weeks ago my colleague, Mark Bennett, posted an article on his blog, Defending People, about David Sklansky's theory of poker.  The theory is, boiled down to its essence, that, in poker, you win anytime you make an opponent play a hand differently than they would have played it if they knew what you were holding.  And, on the other hand, you lose anytime you play a hand differently than you would have played it had you known what your opponent was holding.

This same concept in an economic context is known as the problem of imperfect information.  In a market analysis, information is a commodity and is available for exchange.  However, as the guiding principle of market economics is scarcity, the acquisition of information is subject to competition.  And, as a result of this competition for information, no one has perfect information.

The lack of perfect information is why some investors can "beat" the market while others lose -- if we all had perfect information our return would be the same as that of the market.  The random walk theory holds that our collective imperfect information guides the market and that, in the long run, we are better off spreading our risk across the entire market rather than trying to beat it here and there.

And this brings us back to the courtroom.  None of us has perfect information.  We weren't witnesses to whatever happened.  Police officers have to decide whom to believe when putting together an offense report. Clients lie to the police.  Clients lie to us.  Witnesses don't remember key facts.  Jury selection is limited to 20-30 minutes.  Judges won't allow questionnaires.

And so, in the courtroom, just as at the poker table, you must make decisions based upon what you think the other side is holding based on your reads and the prosecutor's actions.  And, just as in poker, the object is to make correct decisions -- you can't always control the outcome.

1 comment:

Deanna Couras Goodson said...

like you say imperfect information is all we've got. You have to take people at their word in poker sometimes as in law (hopefully, tho' more often).

Your post helped me, a poker player who used to be a paralegal and aspiring lawyer, understand Sklansky's theorem better.