Asset Allocation Under Dynamic Constraints: Role of Information and Wealth Inequality
Posted: 28 Dec 2019
Date Written: March 8, 2019
Resource allocation is an integral part of the lives of every individual living in today’s modern society where capitalism has made available a plethora of choices ranging from choosing your career to choosing your meal. Irrational decision making leads to a cascading effect not on just the well-being of the individuals but also on the society as a whole. Intuitive causality tells us that in decisions made under the absence of information lead to poor results. Today information asymmetry is playing a major rule into the already burgeoning inequality between the people of highest and lowest strata. It might be possible to reduce this inequality by addressing the problem of information asymmetry. We attempt to juxtapose the decisions made in presence and absence of certain information by experiments and try to decipher till what extent the lack of information leads to a poor decision-making and what remedies can be thought of to address the problem. We design a set of experiments carried out with two groups of university students, where one group has access to certain decision inputs while the other group is constrained with limited information. In the dynamic resource allocation game, we observe that the participants with more information were able to take decisions relating to allocation of financial resources that led to better outcomes. This was reflected from the amount of investments made by the group as well as the job choices chosen. These results point towards a dire need for information dissemination especially when it comes to the role of informed resource allocation in reducing inequality in a rapidly growing country like India. When individuals are aware of the opportunities at hand as well as the risks and rewards attributed to the same they are able to make choices that help them lift out of poverty. These results can be particularly useful in conceiving and designing government programmes that are targeted towards the poor. Despite the presence of numerous schemes, the lack of adequate information leads to poor outcomes.
Keywords: experimental economics, asset allocation, stochastic karnel, decision making
JEL Classification: C93, E71, G41
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