An eclipse that sheds light on the impact of hidden information!

The spotlight on a rating kept in the shadows! 

During your holidays, you probably looked up restaurant ratings before deciding where to eat. Such ratings were at the heart of a recent experiment¹ in which some participants were placed in the fictional role of a restaurant owner who secretly received a health inspection score reflecting the cleanliness of their establishment (ranging from 1/5 to 5/5, with higher scores indicating better hygiene). The restaurant owners could then choose whether or not to disclose their rating. Unsurprisingly, the higher the score, the more likely they were to reveal it: only 3% disclosed a score of 1/5, compared with 63% for a score of 3/5 and 95% for a score of 5/5. Logically, the absence of information resulting from non-disclosure should signal the possibility of poor hygiene standards. Yet while this intuitive correlation provides a useful clue, the participants assigned the role of customers, who were asked to estimate the 465 undisclosed ratings, assessed the average hidden score at 2.2/5 rather than assuming the lowest possible rating (1/5). The researchers concluded that, in the absence of information, customers tend to be overly optimistic. In fact, their estimates were approximately 20% higher than the average rating of restaurant owners who chose not to disclose their score, even though the lack of transparency should have served as a warning signal. The study also highlighted that some well-rated restaurant owners opted to keep their scores confidential. For example, 37% of those who received a rating of 3/5 chose not to disclose it, meaning they did not follow the optimal disclosure strategy.

This study highlights the limitations of the classical economic theory of voluntary disclosure, which holds that if revealing favorable information is both credible and inexpensive, then all high-quality actors should choose to disclose it. However, just as some restaurant owners failed to optimise the disclosure of their positive ratings, the apparent absence of information should not automatically be interpreted as a warning sign. Indeed, certain non-mandatory information may, rightly or wrongly, be perceived as difficult to interpret, irrelevant to the decision-making process, or likely to bias judgment through undue influence, such as strong historical performance figures. Rather than dismissing an option simply because some information appears to be missing, it is important to investigate further and ask questions in order to make a well-informed decision. After all, there is no such thing as a stupid question.

The alignment of the stars to reach the moon!

Determining the optimal amount of information is not always straightforward: how can we ensure we have enough information to make sound decisions without getting lost in unnecessary details? A group of 24 participants², including 12 economics students, took part in a simulation designed to study how individuals acquire the right amount of information. The objective was to align information needs with available data in order to maximise returns. Each participant started with a sum of money and, during each round of the experiment, had to choose between two projects. One project generated a gain, while the other resulted in an equivalent loss. Success depended on the value of three hidden variables, which participants could uncover by purchasing additional information. In reality, there was a constant underlying rule³ that, once understood, made further information purchases unnecessary. However, only a limited number of participants identified the optimal strategy. Economics students performed somewhat better, with 50% discovering the rule compared with 25% of the other participants. Many underestimated the value of information and chose to save on information costs, ultimately harming their performance. Conversely, some participants successfully uncovered the rule but continued purchasing unnecessary information. This behavior reduced potential earnings by 40% among non-specialists and by 10% among economics students. This experiment illustrates the challenge of finding the right balance between gathering enough information to make informed decisions and avoiding the costs and distractions associated with excessive data.

Without calling into question the conclusion of the previous study, namely that missing information should be sought out, the academic research discussed above highlights just how differently we approach information. For some, the challenge lies in acquiring too little of the information needed, whether through lack of awareness, politeness, or simple inertia. For others, the risk stems from gathering excessive amounts of information, much of it irrelevant, which can obscure the key factors that should guide a decision. Of course, obtaining useful information can entail a financial cost, whether through the purchase of data, research, or other resources. However, when it comes to personal financial management, the true cost is more often measured in time, effort, and attention. It is therefore wise to calibrate carefully the resources we devote to uncovering hidden information, ensuring that our search for insight remains both purposeful and efficient.

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We hope this article will help propel your financial performance into orbit!

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