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Toward a Broader Conception of Adverse Selection

bayesshammai.substack.com · 3,781 words · saved by 1 readers

Adverse Selection is the phenomenon in which information asymmetries in non-cooperative environments make trading dangerous. It has traditionally been understood to describe financial markets in which buyers and sellers systematically differ, such as a market for used cars in which sellers have the information advantage, where resulting feedback loops can lead to market collapses. In this post, I make the case that adverse selection effects appear in many everyday contexts beyond specialized markets or strictly financial exchanges. I argue that modeling many of our decisions as taking place in competitive environments analogous to financial markets will help us notice instances of adverse selection that we otherwise wouldn’t. The strong version of my central thesis is that conditional on getting to trade2, your trade wasn’t all that great. Any time you make a trade, you should be asking yourself “what do others know that I don’t?” This does not mean that your trade is necessarily net b

Toward a Broader Conception of Adverse Selection Conditional on getting filled, are you still happy with your trades? Ricki Heicklen Mar 14, 2024 43 13 Share “I refuse to join any club that would have me as a member” -Marx 1 Adverse Selection is the phenomenon in which information asymmetries in non-cooperative environments make trading dangerous. It has traditionally been understood to describe financial markets in which buyers and sellers systematically differ, such as a market for used cars in which sellers have the information advantage, where resulting feedback loops can lead to market co

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