Adverse selection in all markets

Adverse selection is a kind of market failure that exists when the information is asymmetric. Then all good goods and services in the markets will be underestimated as people will price them the same as they the bad goods and services, because they cannot be certain about the qualities of goods and services. Such problems could occur in every single market. Our society has countless numbers of goods and services have been available for us; however, we can never know all the information about the goods and services. As we cannot know all the information about goods and services that are available for us, information asymmetry can occur in every single market. For example, when we go into a supermarket, we do not know what exactly Coke will benefit or cost us, the only thing we know about is its taste. Then we can price Coke incorrectly and make incorrect shopping decisions, but we do not realise.

We do not understand how our goods and services are exactly produced and provided, we will never give a fair price or value to the goods and services that are available. Such information asymmetry will cause adverse selection in all markets; and many of our decisions are influenced by advertise or others' opinions and feedbacks. Therefore, the expected utility is not objective. In financial markets, it is the same. Although public companies have to provide their financial statements, there is much information about these companies that stays private. Therefore, we usually imagine what happens if the worst thing happens.

Overall, I think that the common risk averse behavior of us is caused by such information asymmetry and adverse selection.