Oh what a tangled web we weave... † Anderson and Smith explore the dilemmas of deception.
On the evening of November 14th 1940 the German Luftwaffe raided Coventry. That night, 515 German bombers destroyed one third of all buildings in the city, while only losing one bomber to Coventry's over-matched air defenses. Some have claimed that Winston Churchill had advanced knowledge of the attack, and yet made a calculated decision not to act. While this claim is disputed, consider the dilemma that a fully informed Churchill might have faced. By taking measures to protect Coventry, he could have limited British casualties and made the raid more costly to the Germans. However, if the Germans detected a shift in British air defenses, they might have realized that the allies had cracked the German code used to transmit orders. The Germans would then abandon the compromised code, and the Allies would lose a valuable source of military intelligence. This example highlights a unique quality of information: Merely using it often gives it away. This "use it and lose it" property of information applies in many important environments. A stock trader attempting to exploit inside information about a company sees his market advantage evaporate with every trade he makes. Attempting to extract gold from public land sparks gold rushes, as on the beaches of Nome, Alaska 1899. Using cutting edge technology in new products allows for reverse engineering by competitors, sacrificing the technological advantage.
In their paper "Dynamic Deception"(forthcoming in The American Economic Review), GCER Fellow and Georgetown Professor Axel Anderson and co-author Lones Smith of the University of Wisconsin explore the dynamic use of private information in competitive environments. They posit a model in which an agent with an informational advantage competes over time with a rival. The more the advantaged agent aligns his actions with his information the greater his current benefit. But, his rival observes a noisy signal of his actions --- the more intensely the advantaged agent exploits his informational edge the faster he loses it. By solving for the unique equilibrium of this dynamic game, Anderson and Smith are able to offer sharp predictions about both the dynamics of behavior and the rate at which the informed player monetizes his informational advantage. Further, Anderson and Smith determine the value of information gathering efforts by the uninformed rival, and use this value to overturn a standard result on information demand in non-rivalrous settings. Finally, Anderson and Smith investigate a form of deception that occurs often: the costly veiling of action by adding observational noise to the situation. One such example is a diversion to distract the enemy's attention before a military invasion. † Sir Walter Scott in Marmion, Canto vi. Stanza 17