Adverse selection refers to a situation where one party in a transaction possesses more information than the other, leading to an imbalance in knowledge.
In insurance or financial markets, adverse selection occurs when individuals with higher risks or unfavorable characteristics are more likely to seek coverage or financial products.
This can result in pricing and coverage mismatches, potentially leading to market inefficiencies. Adverse selection underscores the challenges associated with information asymmetry in various economic transactions.