It Pays to Know What You Don't Know

Knowledge is power but much depends on how asymmetric it is: what do you know that others don’t and vice versa. Below are four strategically different levels of know-how plus some of the strategies you can use to leverage each to advantage.

The complex issue of handling asymmetric information is central to the field of game theory– a rigorous analytic discipline used widely in economics, business, strategy, political science, law and more. I’ll address here the mind-twisting problem of how much you know about what others do and don’t know, and conversely, what they know about what you do and don’t know. This may seem esoteric but we encounter such issues daily. Let’s start simple and then build up the layers of asymmetric know-how.

Level 1: Only You Know About a Misdeed. Suppose you find out that your main competitor has stolen some of your intellectual property (IP) or other assets, and is using this against you. It could be some proprietary software, a customer list, a supplier contract, wage scales, your pricing strategies, or other confidential know-how. Often the IP thieves will be within the organization, as happened to the National Security Agency and numerous companies in such fields as oil & gas, agricultural seeds, and all manner of technology. The U.S. Department of Commerce estimated that IP theft has accounted for trillions in lost value. Much of this comes from industrial espionage by outsiders as well, especially China, although many countries and rivals play this game.

Your first reaction when learning that your secrets were stolen may be to cry foul and call the lawyers. But there may be advantage in you knowing something about their misdeeds while they don’t know that you know. First, you could infringe some of their IP as payment in kind, with a soft hint that two can play this game. This may lead to tacit collaboration, a formal licensing arrangement, or conflict resolution less costly than an ugly shoot out at high noon with legal gun slingers. Also, reconciliation can build understanding, trust or even empathy. For example, when parents find out that their young child stole some of their cash, smoked pot or drank alcohol, they can jump all over the kid or gently signal awareness, in ways that allow for face saving self-correction and maturation of the child.

Level 2: The Other Party Knows You Know. Suppose, however, that your competitor finds out on its own– without you having informed them– that you know that they have violated your IP. What should you do in this symmetric knowledge situation about the violation? First, it may not be truly symmetric because the rival may not know that you know that they know. This is akin to a child knowing that his parents found out about the smoking or drinking, while still being unsure about whether they know that he knows that. For example, it could be that the maid told the child that the parents know. As before, it may be wise to keep such meta-knowledge (i.e. what each of you know about what the other knows) asymmetric since the situation may automatically correct itself. The child will either stop his misdeed or become even more devious perhaps– although he now realizes that his parents are not as clueless as he previously assumed.

Level 3: A Child Knows His Parents Know that He Knows. Suppose that the child discovers, perhaps from the maid, that his parents now know that he knows that they have uncovered his nefarious deeds. This would be embarrassing, even though some semblance of ignorance can still be feigned, since his parents have not directly confirmed this by confronting him. Perhaps the maid lied and is playing her own game to get the child to cease his infractions, concerned that the parents will blame her for not telling them. Without complicating this layer cake further, with the maid’s varying degree of knowledge and hidden agendas, it should be clear that knowledge asymmetry can happen at multiple levels.

The first is knowledge about presumed acts of behavior (such as an IP infringement). The second level concerns the parties’ awareness about what the other side knows and doesn’t know. The game theory aspects of just the two-party conflict becomes more complex at this higher strategic level. It will seldom be optimal to put all cards on the table if tactical advantage is the aim, since judicious signaling, while avoiding loss of face, may lead to better outcomes. In international negotiations about violations of trade agreements, for example, a piecemeal approach may lead to better outcomes than fully escalating the conflict with hurt egos and further recriminations.

Level 4: Full Parity – Everybody Spills the Beans. Suppose, however, that parents tell their child that they know he knows that they know; the strategic situation now will reach a different level of meta-knowledge yet. If the indirect approach mentioned in level 3 does not work, then in anything from corporate disputes to child rearing to marital infidelity, it may pay to put all cards on the table. If restricted to one single issue, such as a stolen customer list or a child smoking pot, talking it all out may–perhaps with the help of a professional counselor–be cathartic. But when multiple issues are at stake, or if there are more than two aggrieved parties, the situation may call for seasoned negotiators who know when to separate or combine issues. One problem is that you will never know for sure that everyone has shared all they know, although legal clauses with punitive damage levels may get you close.

The general advice in complex cases of conflict is to pursue principled negotiations rather than positional bargaining, as explained in Getting to Yes. Try to agree on the principles that should govern the issue to be negotiated, such as trade dispute or a salary raise, before haggling about dollars or concessions as though you are in a bazaar. For example, should the primary reference point when hiring new managers be their past salary, your own internal payment scale, or the amount an outside party is offering them? Once you agree on that in principle, the remaining negotiation will be much easier. Also remember that good negotiators spend more time understanding the other side’s hopes, fears, and context than just their own agendas, plus any knowledge asymmetries that might exist.

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