In 2001, George A. Akerlof, A. Michael Spence and Joseph E. Stiglitz were awarded the Nobel Prize in Economics for their theory on how markets operate when transactions involve asymmetrical information. Asymmetrical information occurs when one party to a transaction knows something the other party does not. Akerlof and his associates demonstrate how asymmetry leads to breakdowns and inefficiency within isolated transactions and within various markets at large. Their theory is useful to anyone who either wants to buy or sell a good used car, or possibly, as is our case, by leaders and managers who are interested in improving their team or organization.
Akerlof uses the used car market to illustrate the problems associated with asymmetric information. While it’s easy to find and list used cars for sale, Akerlof notes how it is difficult for the market to provide accurate pricing for above average and average automobiles. This market difficulty is attributable to the fact that most of the information about quality is held internally by only one party, the seller. Thus, information as to quality is asymmetrical.
The upshot is that since buyers have a hard time distinguishing good cars from bad cars, buyers are reticent to trust higher prices and tend to focus on cars with lower prices. Why? Well, when someone offers to sell you a car at a low price, you trust their asking price because you believe they are telling the truth. If the car were more reliable they would be trying to get a better price. It’s a safe assumption that most sellers do not underprice their automobiles just to be nice.
Since most of us agree that low price means low quality, both the buyer and the seller have equal information, or they have at least enough information to move forward with some degree of confidence. The same does not hold true when dealing with better cars and higher prices. We are sure the seller might be hiding something.
The market consequence is that we are willing to engage in transactions that involve low prices, but we are slow to consider cars with higher prices. The market becomes inefficient, and the eventual outcome is that a surplus of low quality cars drives the good quality cars out of the market (pun intended). How many times have we all heard the phrase, “That car is worth more to me than what I can sell it for?” The owner would like to sell her car if the market could do a better job of establishing the right price for above-average used cars so that she could receive fair value in the exchange.
In building an organization’s employee experience, you we need to consider the lessons that can be learned from Akerlof and his associates. Asymmetrical information is the enemy of trust. Unsurprisingly, trust is eroded when we believe others are withholding information or where we do not have enough information on our end to move forward with conviction. We hesitate, just like the used-car buyer who frets over whether he is getting the deal of a lifetime or a bucket of bolts and a set of blown valves, worn rings and a barely-working water pump.
In modern workplaces, hesitation and mistrust is problematic as it decreases focus and slows positive momentum and progress while employees sort out which information is reliable. I can tell you from experience that organizations where trust is missing are brutal places to work. It often takes a herculean effort by management to turn things around.
The better course is to nurture trust before things get out of hand. Nurturing and growing trust should be a fundamental component of your employee experience. Leaders need to look for ways to create a working environment that rewards trust and penalizes deception.
In our view, trust is best fortified and grown through expectation alignment. We all have some experience trying to manage unrealistic expectations. Usually, in those instances, no one ends up happy. But, I am not talking about a scenario where you try and keep everyone satisfied by negotiating compromises. Instead, we recommend you do the following:
- Determine those expectations and requirements that are important to your organization considering its mission, objectives, and short-term goals.
- Communicate often and clearly what the organization’s expectations are and why they are important to the organization’s success.
- Listen and consider the employees’ expectations.
- Accommodate employee expectations that are reasonable and will either promote the organization’s purposes, or, at the very least, not detract from key objectives.
- Explain and demonstrate how expectations are now aligned.
- Continually listen and monitor to see if expectations are becoming misaligned or whether circumstances have caused new expectations to form.
- Repeat the process when significant expectation gaps arise.
Interestingly, my firm has found that the nature of a person’s expectations is less important than whether there is alignment between the parties. Again, the used car market illustrates this point all too well. If we buy a low-priced car and it breaks down, we become less upset because “we got what we paid for.” On the other side, nothing is more frustrating that than paying top price for a late model Honda Accord, only to find yourself stuck with a costly repair bill. Just like we don’t relish surprises with our used cars, employees do not thrive when there are too many surprises at work. They prefer consistency and predictability.
Consider the case of the “tyrant-manager.” This is the person who drives her team hard. If the “tyrant” is consistent, eventually equilibrium is found. Her subordinates learn to cope and adapt, because they trust that the tyrant will behave the same on Tuesdays as she does on Thursdays. Transactional efficiency between the team is obtained, even though working conditions could be better.
On the other side of the coin is the manager that is wildly inconsistent, but is more likable. Even though this manager may be personable and approachable, his constant swings ensure that equilibrium is never reached. His team becomes bogged down by second guessing, a lack of trust and the inefficiency caused by asymmetrical information (only the manager knows what will happen next).
To combat the problems associated with asymmetrical information, we recommend leaders focus on building an employee experience where expectations gaps are constantly being bridged and where trust is encouraged and valued. If you put some effort into this aspect of your leadership and your employee experience, the benefits will be improved team dynamics and an increase in efficiency, which, after all, is the Holy Grail of economic professors worldwide.