10.10
The “adverse selection” is a term used in financial economics to designate the process by which a trader makes a wrong decision because of information asymmetries between buyer and seller.
For their part, “information asymmetry” refers to the fact that one party can be better informed than his counter-part. It is, to all practical purposes, impossible to achieve a condition where the masses are uniformly informed about any relevant topic. In this regard, it is assumed that those better informed and better decisions at the expense of the less informed, who in all likelihood suffer losses. However, the uniform and symmetric information is not guaranteed success, let’s see why:
Imagine a situation where two agents have exactly the same information (symmetric in this case), this being true and accurate. A company in the first quarter resulting in 12% increase in earnings and, in reaction to this news, the title goes on the market. In the second quarter the company again reported 12% increase on their earnings but now the company is experiencing a run. What happened? Ah! Simply harmed expectations. Surely it was expected to increase by 20% instead of 12%. Opposite reactions against the same piece of information, uniform and symmetrical. Disconcerting, right? We can still make things more complicated.
The phenomenon can be aggravated stock to the extent that a piece of clear and unambiguous, some people give an interpretation, while another group can give otherwise fairly disparate. For example comes news that Home Depot inventories are rising. For a good part of the public, the news is good because they are convinced that to support increased demand, are piling up goods for sale. For the other part of the public good, this news is fatal, because he thinks they are not selling enough and hence the accumulation of inventory. Who is right? For me the correct answer is that neither the one nor the other is right. Just behind any apparent “good source and good data” hides a veil of ambiguity, that nobody but a few experts get crack.
For the correct interpretation of market data, it takes much more than the information industry generally offers. Among many other mechanisms can quote, if I in particular had key information about some aspect of the market, the first thing is do not tell anyone (asymmetric in this case) and try to take advantage for myself. Why should I give away what is precious to perfect strangers?
Hey I wants to disturb you!
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