Deinonychus antirrhopus

Adverse Selection

This post by Tyler Cowen highlights quite nicely the problem with adverse selection.

Adverse selection is basically a problem where different events have different probabilities of producing unfavorable outcomes, and individuals who are involved in the event know these probabilities while others do not. Basically, think of it as inside informatin.

The post by Tyler Cowen looks at Google going public with its stock and wonders is it such a boon. The initial reaction might be, "Ooh, I should get in on that." But should you? If Google is such a great thing, why go public? Why not keep all that money for yourself? Maybe the people at google know something we don't? And that last part high lights precisely the problem of adverse selection.