The Paradox of Partial Information

Friday Reflection | December 11, 2020

The Paradox of Partial Information

“Most decisions should probably be made with somewhere around 70 percent of the information you wish you had.”
– Jeff Bezos, in Amazon’s 2016 Annual Shareholder Letter [1]

Certainty can be elusive, and too often, the act of waiting for complete information means that an opportunity passes by. A framework for decision making can be helpful, as well as input from friends or advisors who share their own experiences, but ultimately many decisions require making a judgment call with partial information.

Investors face these decisions repeatedly. Opting to wait for more information in favor of more certainty – whether the passage and detail of a stimulus bill, the final results of an election, or waiting for a company to prove years of strong earnings – may mean missing the short-term price opportunity.

This week stock market prices moved slightly lower following a lackluster jobs report and slowing economic data.² Some investors viewed this news as increasing the likelihood of a bipartisan stimulus bill, despite continued evidence of congressional infighting on several points. The key issues remain liability protection for businesses and support for state governments. Congress is scheduled to leave for its holiday break on December 18 – making the coming week a critical stretch for short-term market sentiment.

Noteworthy this week were the two IPOs of Airbnb and DoorDash. In recent years, employees joined these companies with this expectation, but they lacked clear information about timing or valuation as they considered the employment offer that included some stock compensation in lieu of a higher salary. In both cases, that faith was rewarded. This placed employees (and investors) at another decision point with partial information:  the decision of when to sell their company stock.  Both companies’ shares quickly jumped higher after their debuts³, with DoorDash’s price increasing 85% on Wednesday, and Airbnb’s price moving up 112% on Thursday.  Employees now face a decision of whether to sell some shares or hold, not knowing if the next move for the stock will be higher still or a reversal of fortunes.⁴ Holding means retaining the potential, and possible tax advantages, while selling means locking in certainty – each decision offers its own specific value.

Our clients face similar challenges of partial information in their personal lives. An example that has arisen this year is the choice of committing to a particular college or paying an upcoming tuition bill without knowing whether classes will be fully virtual and the physical campus closed. This key information is inherently unavailable when the decision needs to be made. This epitomizes the decisions we all make daily during this pandemic, altering our behaviors without perfect information about precautions that others are taking or where the invisible virus is lurking. We cannot stop all forward movement in our lives, but we can choose to pay a certain price of inconvenience for increased health and security.

Another common example our clients face is the complicated decision of helping a partner or parent consider care needs. The decision to purchase long-term care insurance needs to be made when the person is healthy, with uncertainty about whether this protection will be needed. The decision to move into certain CCRCs or eldercare communities similarly needs to be made before health begins to deteriorate materially. The complexity of determining their likely pace of physical or mental decline is tricky to balance with the benefit of staying in a long-familiar environment or with family. Often, too, the priority at one point in time gives way to a new concern when a sudden health event occurs.

One way to move forward with these decisions is to focus on what you are getting now. In the instance of insurance, what you are buying is certainty and security. The feeling of security that insurance is in place to ease the financial aspects of a health crisis, the ability for a college student to commit themselves to remote learning and staying on track with a cohort, or the security of knowing that a parent is in the right environment with the right care – all these bring a sense of resolution and security that has value and can be worth paying for.

We value diversification in portfolio management as well as in broader life choices. In a portfolio, we take risks in pursuit of growth with some assets, while emphasizing protection and stability with others. Expanding that lens may mean balancing a high risk/high growth career decision with a more stable portfolio allocation. It may mean paying for robust LTC and life insurance coverage even if you are healthy because you have seen the challenges of cognitive decline in your own family. The peace of mind you get in the present can be more meaningful than saving money on premiums. The balance is personal and needs to support your specific landscape of resources and concerns.

Timing matters too. Deadlines create clarity, but our most momentous personal decisions often come without a deadline. And yet, a particular decision – whether to move to assisted living, whether to change careers – will look different in the present moment than the next unknown moment when you revisit it. Your sense of readiness for change will impact your timing, and whatever choice you make, you’ll be living with both its benefits and downsides as you move forward. Not making a decision at all is, in fact, a decision to remain on your current path.

Robert Frost’s poem The Road Less Taken comes to mind, with his contemplation of two unknown paths that diverge in a wood. The very human dilemma of longing to “…travel both, And be one traveler…” exists in many daily life choices, when we have only partial information about what lies ahead. After choosing one path, Frost says, “Yet knowing how way leads on to way, I doubted if I should ever come back.” Our personal choices shape the landscape as we walk on, leaving behind some options, but also brings us to other choices we couldn’t have previously imagined. 

¹ 2016 Annual Shareholder Letter https://www.aboutamazon.com/news/company-news/2016-letter-to-shareholders

² Initial jobless claims jumped to 853,000 last week, their highest level since mid-September, and continuing claims for the latest week rose to 5.8 million, above the consensus forecast of 5.5 million. It is the first time since August that continuing claims increased week over week.

³ Airbnb Stock Closes at $144 After Pricing IPO at $68 a Share Barrons.com

⁴ Per Airbnb’s S-1 Filing, most employees are able sell up to 15% of outstanding stock for a 7-trading day period beginning on the first trading day once the common stock is traded on the Nasdaq. If certain conditions are met, additional shares are able to be sold by employees after the company reports Q1-2021 earnings, and all lockups are lifted after Q2-2021 earnings are announced.