Adverse Selection

Adverse selection happens when there is a disparity in information between two parties making a trade. For example, the seller of a car may know that the car is a lemon. Despite it’s defects, the seller might price the car at a price comparable to a fault-less car.

The second order effects of adverse selection are that often times those most proposing a trade often have more information than you do, and so you should be wary of the terms being offered1.


References

1.
Lewis, M. Going Infinite: The Rise and Fall of a New Tycoon. (W. W. Norton & Company, 2023).