Perfect information

Perfect Information is a term used in economics to describe a state of complete knowledge that is available to all market participants and that is instantaneously updated as new information arises. Perfect information is one of the theoretical pre-conditions of an efficient perfectly competitive market. In a sense it is a requirement of the assumption also made in economic theory that market participants act rationally; if you could not assume that all the market participants had all the information available, then you would have to model and forecast how the market would be affected by the uneven distribution and delayed diffusion of information.

In practice, the assumption of perfect information is unlikely to be correct for real world situations. For example, in the stock market, even the most sophisticated financial investors do not receive information instantly and do not react to it instantly. The large financial firms that have institutionalised the financial markets are overwhelmed with the volume of information that they are required to digest. Many of their major decisions are taken by committees or small groups of people that take time to convene, discuss, analyse and take decisions as to what to do. It can take a long time for major institutions to move their funds from one asset to another because they have to manage market impact (the effect of their own actions on asset prices).