What is information asymmetry and why is it important for investors?

Information asymmetry occurs when one party in a transaction has more or better information than the other. In business, companies that possess exclusive data or superior analytics can use this knowledge gap to their advantage—setting better prices, evaluating risks more accurately, or making smarter decisions than competitors or customers. For investors, companies that successfully leverage information asymmetry often develop strong competitive advantages that can translate into higher profit margins and sustainable growth.

How do credit bureaus like Equifax and TransUnion make money from information?

Credit bureaus collect vast amounts of consumer financial data, including payment history, credit usage, and loan applications. They package this information into credit reports and scores that lenders use to assess risk when making loan decisions. These companies profit by charging banks, lenders, landlords, and other businesses for access to this valuable data. They've created a business model where they're the gatekeepers of essential information that other companies need but cannot easily gather themselves.

Why are companies like CarMax and Carvana included in this investment theme?

Used car sellers like CarMax and Carvana have built sophisticated data systems that give them a major advantage in vehicle pricing. While most consumers buy or sell cars infrequently and lack pricing expertise, these companies have accumulated data on millions of transactions. This allows them to accurately determine a fair market price for any vehicle based on condition, features, and market trends. They profit from this information gap by purchasing vehicles at prices favorable to their business model and reselling them at optimized margins.

How does artificial intelligence impact companies in this theme?

AI and machine learning act as powerful multipliers for companies that already possess valuable data assets. These technologies allow firms to analyze larger datasets more quickly, identify subtle patterns humans might miss, and make more accurate predictions. For example, companies like Upstart use AI to analyze non-traditional data points for credit decisions, potentially identifying good borrowers that traditional credit scores might overlook. As AI capabilities advance, the competitive advantage of data-rich companies can grow even stronger, widening the information gap between them and their competitors.

What risks should I be aware of when investing in information asymmetry companies?

While information advantages can be powerful, they're not without risks. Regulatory changes could limit how companies collect or use consumer data, as we've seen with privacy laws like GDPR and CCPA. Additionally, technological disruption could reduce information gaps—if better data becomes widely available, the advantage diminishes. There's also reputational risk, as consumers increasingly scrutinize how their data is being used. Finally, high investor expectations for these companies can lead to premium valuations, which means any slowdown in growth might result in significant price corrections.

16 handpicked stocks

Information Asymmetry Arbitrageurs

These companies build their success on knowing more than their customers. Our analysts have selected businesses that create lasting value from proprietary data and analytical advantages in complex markets like credit scoring, auto sales, and insurance.

Han Tan | Market Analyst

Updated 2 days ago | Published at juin 17