010 - Asymmetrical information and risk management in the use of statistical inferences for policy decisions

Statistical inferential results generally come with a measure of reliability for decision-making purposes. Consumers who implement policies based upon statistical results may find it difficult or impossible to determine whether the producers of those results are overstating reliability. This information asymmetry between producers and consumers can lead to an adverse selection problem where, at best, the full benefits of a policy are not realized or, at worst, a policy is deemed too risky to implement at any scale. Producers can remedy this by offering a performance guarantee to consumers. Producers can overcome their own risk aversion and wealth constraints by sharing risks with other producers. The problem and remedy are illustrated using a confidence interval for the success probability of a binary policy outcome.

adverse selection

binomial proportion

confidence interval

information asymmetry

principal-agent problem

statistical inference