Why is the assumption of perfect information critiqued in decision-making?

The assumption of perfect information is critiqued because it is unrealistic and does not reflect real-world decision-making.

In economic theory, the assumption of perfect information suggests that all participants in an economy have complete and accurate knowledge about all goods, services, and prices at all times. This assumption is a fundamental part of many economic models, particularly those in the field of neoclassical economics. However, it has been widely critiqued for its lack of realism and applicability to real-world situations.

One of the main criticisms is that perfect information is simply not feasible in reality. In the real world, information is often incomplete, inaccurate, or difficult to obtain. Consumers do not always have the time, resources, or ability to gather and process all the information necessary to make fully informed decisions. Similarly, businesses may not have complete information about market conditions, competitor actions, or consumer preferences. This lack of perfect information can lead to market failures, such as information asymmetry, adverse selection, and moral hazard.

Another critique is that the assumption of perfect information ignores the role of uncertainty in decision-making. Even if individuals had access to all relevant information, the future is inherently uncertain and unpredictable. Therefore, decisions often involve a degree of risk and uncertainty, which is not accounted for in models that assume perfect information.

Furthermore, the assumption of perfect information assumes that individuals are perfectly rational and always make decisions that maximise their utility or profit. This ignores the fact that human behaviour is often influenced by cognitive biases, emotions, and other non-rational factors. Behavioural economics, for example, has shown that individuals often make decisions that are inconsistent with the predictions of traditional economic models.

In conclusion, while the assumption of perfect information can simplify economic models and make them easier to analyse, it is often critiqued for its lack of realism and applicability to real-world decision-making. By ignoring the complexities of information gathering, the uncertainty of the future, and the non-rational aspects of human behaviour, it may lead to inaccurate predictions and policy recommendations.