Chapter 2: How Is the Ku Klux Klan Like a Group of Real Estate Agents?

This chapter argues that nothing is more powerful than information, and illustrates how one of the most easily abused gaps in economy is between those with knowledge, and those without it.

The success and downfall of the Ku Klux Klan, the skills of real estate agents, the number of responses received by online daters, the decision-making process of a potential automobile buyer– what do all of them have in common? The answer: information asymmetry.

Information asymmetry is a situation in which one party knows something the other doesn’t, or knows more than the other. Each of these examples illustrates how people used some information that they had, which the people they dealt with did not, to their advantage.

The chapter also talks about one powerful new-age antidote to the abuse of information asymmetry: the Internet.

One of my favorite anecdotes from the chapter was one that illustrates the shameless ease with which experts often play consumers using their information advantage. It is the story of a Stanford processor who wants to buy a house on the university campus. Having found a house he liked, the seller’s agent tells him that he should take the deal, it is the best he will get as the market is about to zoom! Convinced that the real estate agent has expert insight into market trends he quickly signs purchase papers. Just when he is done the agent asks if he would like help to sell his own house. When the professor expresses a desire to try and sell it himself, the agent says, oh, I wouldn’t advise you to do that, the housing marking is tanking, you know!