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Monday, June 21, 2010
One aspect of economics that affects world markets as well as your personal finances, is the free flow of information. The more "transparent" a market is, the more rational it is, as people can make rational decisions based on realistic appraisals of market forces.
Many people like to run down the free-market concept, pointing to lapses in the economy as "proof" that capitalism doesn't work. But a truly free-market has a free flow of information, and we've rarely ever had that in this or any other country, in the history of mankind.
(Some so-called free-market advocates argue that deregulation is the key to a free-market economy. I disagree. Regulation is not the problem. Simple, direct and transparent regulations are the answer. When regulations are obtuse and enforced unevenly, markets suffer. There is nothing wrong with regulation, provided it is transparent and consistent).
Markets that are opaque are often stagnated, or worse, they fluctuate wildly. People either avoid making purchases or investments when they are uncertain of a market - or they make staggeringly bad economic choices. When people have no idea what they are buying and selling, it is a lot easier to sell them a pig-in-a-poke.
The recent economic downturn was caused by information hoarding. In the 2000's, people made wildly bad economic decisions based on bad data - opaque markets and opaque financial instruments. People bought stocks based on the price history - as opaque an indicia if ever there was one. Quarterly reports were (and are) incomprehensible to the average person. And increasingly, they are fudged and falsified. Enron was a classic example of this opaqueness.
In the 2010's markets are stagnating as people avoid making investments and purchases, for fear of another fiasco. They do not have clear information about the markets, so they retract in fear. So capital dries up, because no one wants to lend, as they feel the risks are not quantifiable.
On a personal level, the more information you have on a subject, the better off you are. Shopping for a home or a car? Knowing market values helps prevent you from over-paying, and also allows you to spot the real bargains. Without this information, you will get fleeced.
Do you know how to fix something? Oftentimes, people throw away or sell (for cheap) items they are convinced are broken or expensive to fix. A person who knows the tricks to repairing such things can snatch up a bargain. Information is indeed power. Lack of information is weakness.
But there are people who like to throw wrenches in the machinery. Rational markets are hard to make money from, other than by working the margins over time. Irrational markets, on the other hand, can be manipulated and the resulting wild swings in prices mean that there will be a few wildly profitable winners and a lot of losers. Joe Kennedy didn't make his millions in a rational market.
The Real Estate bubble was a case in point. The various mortgage-backed securities and derivatives were opaque to the buyers. No one in the financial world had a realistic assessment of what they were buying or what the real risks were. As I have noted time and again, the more complicated you can make any transaction, the easier it is to fleece the customer. So derivatives are tricky, simply because they are complicated. If you don't understand the underlying product and buy, instead, based on "what everyone else is paying" you will get ripped off.
And for the individual, the same was true. People thought Real Estate would continue to go up and up - because everyone said so. Very few voices (mine included) said "Hey, maybe this doesn't make sense! Why pay twice as much to own as it would to rent?" And what information was out there for the individual consumer was actually disinformation - "You'd better buy now before you get priced out of the market!"
Many a Real Estate agent actually said that, only a few years ago. And just as in 1989, getting "priced out of the market" turned out to be an illusion. The market cannot function if prices are too high for anyone to buy. It seems axiomatic now.
The worrying thing for investors today, I think is their 401(k) plans and mutual funds. Think about it - what do you really know about your 401(k) investments, other than the brand name of the investment company and the name of the fund and its associated risk category? Do you know what stocks or other financial instruments you are invested in? And the answer of course, is, you don't. You buy a mutual fund because other people say its a good fund and the prospectus shows that past returns were pretty good. "Past performance is no guarantee of future returns" of course. We hope our investments do well. But that's all we can do, is hope. If we had more information - basic, concise, clear information - perhaps we could make more informed investment decisions.
The free flow of information allows markets to operate efficiently and smoothly - and cheaply. many. Many professions, it seems, are little more than the dispensing of information. The law business is one of these. Very little of a lawyer's time is spent in actual skill-based tasks - making arguments or writing pleadings. Most of a lawyer's job is educating the client - "counseling" we call it.
I try, in my practice, to educate my clients. I end up telling people the same thing over and over again. So I try to write articles on topics where people ask the same questions again and again.
Other Attorneys think this is an anathema. After all, "You should never tell the client more than half of what he needs to know - that way he comes back for more consulting later on!" And I kid you not, many Attorneys practice this way. They have no real skill sets other than in doling out bits of information.
The Dilbert Comic strip did a piece on the Information Hoarder. Information hoarders are people who like to have information, but never give it out - or give it out in dribs and drabs, so you keep going back to them for more information.
True information hoarders will hoard any information, regardless of values. You ask them a simple question, and they get evasive or give partial information. "Where's the rest room?" you ask. "Um, gee, I'll have to get back to you on that," they reply. Simple information which is of no inherent value to them is kept as a closely guarded State Secret.
Why do they do this? I think like people with hoarding disorder, it is a form of mental illness. Giving out information, they feel, is giving away something for free - something that took them effort to obtain. So why give it up? You ask them a direct, informational question, and they nod and go "Yup" and say nothing else.
For example, I asked a neighbor the other day about road paving. We live on a private road, and the road association was planning on stoning and oiling the road, with each owner paying for their own section. In year's past, our section was bypassed, as no one bothered to ask us if we wanted our section done. The information was hoarded like a State Secret, with only those "in the know" being allowed to participate. At the same time, these same people complained that "not enough people participated in the stoning and oiling project!"
Information hoarders tend to work this way, keeping things secret and then complaining when no one is well-informed.
So this year, I asked the fellow, "Who do I contact to have my section stoned and oiled? How much is it? Who do I send the check to?"
"Um, Yup. I'll have to get back to you on that."
And when he did get back, he gave only partial information. "Yea, we're going to stone and oil this year" (I already knew that, gee, thanks). So I ask again about the particulars. "Um, Yup. I'll have to get back to you on that."
All I needed was the name of a person he knows personally, who is an officer of the road association. But for some reason, this simple piece of information, which is a matter of public record, cannot be divulged. So I have to go track down the data myself - which is the best thing to do when confronted with an information hoarder. Information hoarders are time bandits and the best thing you can do is identify them early on and then do an end-run on them whenever possible.
Why do people become information hoarders? I think it is a means of getting attention. If they give you the information you want, you'll likely not talk to them again. After all, the types of people who engage in this kind of stunt are never fun to be around. And if they have nothing that anyone needs, perhaps no one will need them.
How can you deal with the information hoarder? If you can at all, avoid them. They are nothing but time bandits, and the time you spend trying to extract from them, simple information, is time you could spend tracking it down in more difficult ways.
You can try to pin down an information hoarder by asking them direct and simple questions and keep beating them up (sometimes literally) until they cough up the goods. But rarely does it work. They come up with more and more clever and evasive ways of answering questions without answering them.
In a work environment, it is sometimes hard to avoid dealing with the information hoarder. And the problem with such folks is that they often succeed in their games, making themselves appear to be "indispensable" as, ironically, sources of information.
For example, I wrote before about the technician where I worked, who kept all the test room schematics in his head. Elaborate control panels were wired up, all in one color of wire (yellow), so there was no way to trace or tell what was going on. When something went wrong, only this one technician could "fix" the problem. And the problem was usually a wire he discreetly disconnected earlier in the day. He successfully convinced management that he was "indispensable" as no one else could maintain the test rooms, and the investment in the test rooms was too great to walk away from.
Weak management falls for such tricks, and ends up keeping a deadbeat on the payroll for decades, rather than just fire the scum and spend a few weeks re-wiring the test room and this time, documenting the work.
If you work at a company that encourages and promotes information hoarders, chances are, it is time to move on. In the long-term, such companies are bound for trouble. As noted above, when information does not freely flow, markets either stagnate or fluctuate wildly. A company that has information constipation will either make no decisions at all ("We need to wait for Bill to get back to us on that") or make wildly inappropriate ones ("This new Vega will be a hit in the marketplace!"). Either way, the company will not operate efficiently and will be trounced by a competitor who promotes the free-flow of information.
Unnecessary secrecy is part of the information hoarder. Information hoarders like to think they are being clever or mysterious by being evasive and opaque about their business as well as their personal lives. The reality is, when they are being "secret" they can make themselves appear to by mysterious and deep. But if they are transparent, you see how pathetic and useless they really are. Again, this is why the information hoarder hoards information.
On a personal level, we see this all the time. People withhold information from one another for no reason whatsoever, other than they feel that speaking truthfully and honestly is somehow, well, giving it away. Once you remove the mystery, perhaps, people might see there is no "there" there and walk away. Keep the mystery, and maybe they will keep coming back. Probably not, but it is a nice theory.
On a governmental level, secrecy has the same effect. Lack of information and coordination between government agencies was one reason the 9/11 terrorists were able to succeed so easily, even as many people raised alarm bells. When a piece of information is kept from others, there is no chance for people to say "Aha! I see a pattern here!".
And that is just the thing with information. The Government (and industry) likes to use the phrase "need to know basis" in determining who can and cannot have access to certain information. The problem with this approach, is that you cannot determine in advance who really needs to know - whether it is a State Secret or not.
So when some Middle-Eastern men attend a flight school and ask to learn how to fly large jets, but are not interested in take-offs or landings, that raised some flags. Flight instructors sent in reports to the FBI. But the person who took those reports didn't see the overall pattern. Big deal - let's go get lunch.
On the other hand, someone at another agency no doubt would have jumped at receiving such a report - particularly with the names of the people involved. They would have seen the pattern and acted. And we would be living in a different world today.
But because of secrecy, such information was not disseminated. And because of "need to know" no one who really needed to know actually knew.
I work in the innovation business. Innovation does not occur on a "need to know" basis. In most cases, great inventions occur when someone combines what were previously thought to be two dissimilar technologies. And often this occurs because the inventor had access to data outside of his ordinary field of endeavor - information that he did not "need to know".
Cross-pollination, they often call it. You take technology from one area, and apply it to another - with an unexpected and beneficial result. Companies and organizations that hoard information tend to calcify, as such cross-pollination cannot occur. Information hoarders are the antithesis of innovation and prosperity.