Advantages of Ignorance

How should one choose what to learn? Knowledge is usually treated as unambiguously valuable, but this is not always true. In some settings, knowledge only becomes useful over long horizons. In others, it becomes useful only after a particular event. And in some cases, acquiring additional knowledge can be actively harmful. This raises a natural question: is it worth strategically navigating what we choose to learn, both in the short and long run? And if so, how?

We have heard the expression, "ignorance is bliss." While many of us resonate with this expression, it turns out ignorance can even be advantageous. There is a clear example in negotiations and sales processes. In venture financing, M&A, or in the sales process, sellers and founders are often frustrated by investors and buyers who do not understand the technology, company, or product. It is puzzling how difficult it can be to explain to an industry expert what they are being offered.

There is a clear explanation of buyer misunderstanding: the onus should be on the seller to convince the buyer of the worth of the offering. Investors in particular intentionally select founders who can clearly and convincingly articulate their value proposition. If a seller cannot do this, the failure is theirs. But there is also a less obvious explanation. Buyers may have a strategic incentive not to fully understand the advantages of what they are being offered.

The mechanism behind this phenomenon is that a lack of knowledge can be a form of bargaining power. The more you fail to understand the value-offering, the lower you will be willing to pay. Once a buyer decides that an asset is worth purchasing at a given price, if it is plausible that the seller may accept that price, it is disadvantageous to learn any additional positive information about what is being offered. While it may, in the long run, be useful to understand the full value of what is purchased, additional information gained during negotiation only introduces the risk that the seller realizes the buyer knows the greater value in the offering and demands a higher price, or introduces the cost of trying to deceive the seller. The logic reverses for negative information: the buyer is incentivized to learn negative information in the prospect of gaining a discount.

In a complementary example, imagine an offering you do not plan to accept, but which could be advantageous to your competitors. In this case, you are incentivized to learn as much positive information as possible, to be sure you are not missing out on a key advantage that would make you accept the offer. In this case, incentives are aligned up to the point that the buyer considers herself likely to buy at a price the seller plausibly will accept. The seller wants the buyer to learn as much positive information as possible to increase the chances of a sale.

Information is not inherently valuable; its value depends on who holds it, when, and under what bargaining conditions. The potential discounts or premiums in a transaction resulting from the knowledge states of the buyer and seller change how we think about valuing knowledge. The finding that knowledge of additional advantages — after learning sufficient advantages of a product to make it worth buying at a plausible price — can only increase the price the buyer pays, indicates that there is a negative value to this knowledge. The buyer theoretically would be willing to pay to avoid learning this, while the seller would be willing to pay to know that the buyer has discovered additional advantages. The opposite holds for negative information about the offering: the seller is incentivized to conceal this information, at least in the narrow bargaining context, while the buyer is willing to pay for it.