How Being Uninformed Costs You Money

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Have you ever negotiated what you thought was a good deal, only to find out later that you didn’t have all of the information? You probably could have gotten a better deal (or wouldn’t have made the purchase at all) if you had all the facts. That’s an awful feeling, because you feel like you let yourself down.

In fact, there’s a name for this kind of interaction, and there are things you can do to keep it from hurting you again.

Information asymmetry

When one party in any sort of transaction knows more than another, it’s called information asymmetry. This mismatch of knowledge means that one person — the one with more knowledge — has more power in the transaction.

That power differential is why you often feel terrible when you find out you got a bad deal because you didn’t know enough. You may feel like you didn’t hold the cards you thought you held — like you were manipulated, cheated, or lied to.

Information asymmetry and your money

When you don’t have all the information, you end up losing money. My family experienced this when we bought our first used car. We did all of the right things: drove it around, took it to a mechanic, and asked good questions. However, the previous owners didn’t disclose that they had used the wrong kind of chemical in the radiator, clogging the entire system. They cleaned it up just enough so it would pass the typical mechanic’s inspection, and they sold it to us.

We found out soon enough what had happened, and we had to replace almost every component of the car’s cooling system. It was incredibly expensive. A mechanic let us know what he found inside, and we were furious. Had we known about the previous owners’ mistake, we would have never bought the car.

If you’ve found yourself in a similar situation, you know the pain of paying for someone else’s transgressions. Information asymmetry causes many of our most frustrating money moments, because you almost always lose when you don’t know as much as the person you’re negotiating with. (See also: 10 Negotiation Mistakes That Will Destroy Your Deal)

Mitigating the effects of information asymmetry

While you can never get inside another person’s head, there are ways to get as much information as possible before you make a financial decision. Research shows that a balance of information creates the best deals possible — the kind where everyone ends up happy. Therefore, both parties should be interested in disclosing as much information as necessary. Here are some steps you can take to help that happen. (See also: 8 Negotiating Skills Everyone Should Master)

1. Educate yourself

Before you enter into any sort of financial transaction, make sure you understand how it works. If you’re getting a mortgage, understand the interest rate, whether your loan is fixed or adjustable, and the loan’s terms. If you’re entering into a business deal, understand the details of what the other person or company does, so you can make sure they are doing as much as possible for you. This takes time, but it will help you get the best deal.

2. Read the fine print

People end up uninformed when they don’t read every detail that is available to them. Sometimes, the fine print is literally so fine that it’s hard to read. When you take the time to read and understand it, though, it will often give you additional information that you need to understand the deal you’re getting — and to negotiate a better one if you need to.

3. Ask an expert

If you don’t understand some aspect of a deal, ask someone who knows the subject at hand to help you out. People sometimes balk at this step because experts often charge money for their assistance (think auto mechanics, home inspectors, and lawyers). However, if you want to be sure you’re getting a good deal, it’s worth the investment.

4. Ask specific questions

People can always choose to lie, but many will not if you ask them a specific question. Even if they’re willing to hide something or omit a detail, they often aren’t willing to outright lie about it to your face. For instance, if you ask, “Have you ever had problems with this home’s foundation?” you are more likely to get an honest answer than if you just ask, “Any serious issues with the house?”

5. Bring out the big guns

This isn’t always possible, but sometimes it’s appropriate to get someone with authority on your side, especially if you feel powerless. When it comes to information asymmetry, this often means paying a lawyer to represent or advise you. This can be expensive, but if you’re in a major negotiation or you feel like something is wrong but you don’t know what, it can save you a bundle in the end.

You can lose a lot of money because of information asymmetry, but you don’t have to. Train yourself to carefully gather as much information as possible before you enter into any sort of negotiation, and try to level the playing field as much as you can. Use your intuition during the transaction to gauge whether something is wrong. If you feel that way, investigate some more. In the end, you will get a deal you feel good about.

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