Perfect information is a situation in which an agent has all the relevant information with which to make a decision. It has implications for several fields.
In game theory, perfect information describes the situation when a player has available the same information to determine all of the possible games (all combinations of legal moves) as would be available at the end of the game.
In game theory, a game is described as a game of perfect information if perfect information is available for all moves. Chess is an example of a game with perfect information as each player can see all of the pieces on the board at all times. Other examples of perfect games include tic tac toe, irensei, and go. Games with perfect information represent a small subset of games. Card games where each player's cards are hidden from other players are examples of games of imperfect information.
In microeconomics, a state of perfect information is assumed in some models of perfect competition. That is, assuming that all agents are rational and have perfect information, they will choose the best products, and the market will reward those who make the best products with higher sales. Perfect information would practically mean that all consumers know all things, about all products, at all times (including knowing the probabilistic outcome of all future events), and therefore always make the best decision regarding purchase. This is physically impossible, however, as the Bekenstein Bound provides a physical limit to the amount of information that can be stored in a given physical system (in this case, a market participant). Still, perfect information is a common assumption in economic models because it allows mathematical derivation of desirable results.
The pervasive effects of information asymmetry in markets have been documented and studied in numerous contexts. In his 2001 Nobel Prize lecture, economist Joseph E. Stiglitz spoke to the faults of standard economic models and the faulty policy implications and recommendations that arise from their unrealistic assumptions, writing:
"I only varied one assumption – the assumption concerning perfect information – and in ways which seemed highly plausible. ... We succeeded in showing not only that the standard theory was not robust – changing only one assumption in ways which were totally plausible had drastic consequences, but also that an alternative robust paradigm with great explanatory power could be constructed."
- Complete information
- Extensive form game
- Information asymmetry
- Partial knowledge
- Perfect competition
- Fudenberg, D. and Tirole, J. (1993) Game Theory, MIT Press. (see Chapter 3, sect 2.2)
- Gibbons, R. (1992) A primer in game theory, Harvester-Wheatsheaf. (see Chapter 2)
- Luce, R.D. and Raiffa, H. (1957) Games and Decisions: Introduction and Critical Survey, Wiley & Sons (see Chapter 3, section 2)
- The Economics of Groundhog Day by economist D.W. MacKenzie, using the 1993 film Groundhog Day to argue that perfect information, and therefore perfect competition, is impossible.