The Double-Edged Sword of Information in the Innovation Economy

Almost everyone in the field of economics believes that information possessed by more people will lead to better overall outcomes. More freedom of information means that the decision makers upon which the economy hinges are able to make the right decision for themselves and everyone else involved. Even when people are competitive to the harm of others, they do so more predictively when a greater amount of information is accessible to everyone. A high level of informational openness makes fraud more difficult and enables mutually beneficial deals that would not have otherwise happened. However, the extreme informational openness of our current economy has a few downsides as well. The innovation economy in particular shows the benefits and difficulties of a high-information world.

As the basis of all human action, openness of information has a great benefit on the ability of investors to recognize potentially successful businesses. Nearly any system functions better when more people have access to more information with some sort of ability to distinguish between the information that is vital for them specifically. The economy of innovation is helped when information is dispersed because whenever someone creates a unique and beneficial idea, it is either copied or grown. Good ideas do not lay dormant, as they are adopted much faster than in an economy with slow travel information. Even when this higher level of information is asymmetrical, it increases flourishing. The select few who possess the information will determine how to monetize it, which will only be possible if they add more perceived value to people’s lives than  they are taking away. Particularly as the world has become more focused on Internet and technology products which can be created far faster than industrial items, constant innovation enabled by easy access of information has trended upwards.

While constant access to information is at the center of the most innovation-enabling systems, the vast amount of information accessible poses some problems. The amount of time and resources it takes to make meaningful progress when dealing with such a large amount of information requires a vast amount of money and thought. Sadly, the ability to have good insight into future successes is not linked to the amount of money that someone has. The sea of information makes it difficult to figure out which information is important and which information is irrelevant. The price system’s beautiful effectiveness is taken out of the picture with the current amount of data that is collected, because rather than coming directly to you as the price system did, this new information lies in store houses just waiting to be analyzed. The high cost to understanding data, which makes it only possible for a select subgroup to use it, means that many startups will be kept on life-support far longer than they should be. Additionally, many future successful businesses are forgotten and receive little access to funding and must wait a far longer time in order to receive the funding that could have helped them earlier. False positives and false negatives abound in such a field of uncertainty. Another problem with such a vast amount of information controllable by a select few means that biases will be repeated rather than average out as with many situations in the market. Thankfully, these poor uses of funds are inevitably found out, it just takes a lot longer than it could otherwise.

The second problem with this vast amount of information in the innovation ecosystem is the human ability to believe we have the answer even when we are far from it. Having a lot of information is a good thing, but thinking it is the answer in itself is not. This manifests itself in an obsession with the numbers of startups rather than their potential. The comparison between investment options as a purely numerical game will always lead the assayers astray. The financial metrics of a startup business often have little to do with their potential for success. obsession with information makes three dimensional problems appear to be two dimensional and reduces the likelihood that an effective company will be recognized. While more information is in itself unequivocally better, the human belief that all can be known continually leads to over certainty. The dynamic reality of the world is limited when we believe that we can extrapolate insights from raw information more significantly than we really can. Sometimes information provides no actionable insight other than “wait and see.” Disruptive processes of the market are limited anytime we try to cling too firmly to our vision of the future no matter how well evidenced that view is. This effect is multiplied when survivorship bias examples of past startups inform future strategies for the evaluation of success. Information is a powerful tool that should be used carefully and with an understanding of human limits.