Information Provision and the Curse of Knowledge

Common wisdom suggests that the “curse of knowledge” (COK), whereby better-informed individuals are unable to ignore their private information when forecasting others’ beliefs, reduces the quality of communication. The authors study how this bias affects costly information provision by a founder who wants to raise financing from an outside investor. When the founder exhibits COK about the content of her communication, there is less information provision and payoffs tend to be lower for both players. However, they show that when the founder exhibits COK about the context of her message, the bias can lead to more information production and better investment decisions. Moreover, this can exacerbate the conflict of interest between the founder and the outsider.