Asymmetric Information

Loading the player...

What is 'Asymmetric Information'

Asymmetric information is a situation in which one party in a transaction has more or superior information compared to another. This often happens in transactions where the seller knows more than the buyer, although the reverse can happen as well. Potentially, this could be a harmful situation because one party can take advantage of the other party's lack of knowledge.

BREAKING DOWN 'Asymmetric Information'

With increased advancements in technology, asymmetric information has been on the decline as a result of more and more people being able to easily access all types of information.

Information Asymmetry can lead to two main problems:
1. Adverse selection- immoral behavior that takes advantage of asymmetric information before a transaction. For example, a person who is not be in optimal health may be more inclined to purchase life insurance than someone who feels fine.
2. Moral Hazard- immoral behavior that takes advantage of asymmetric information after a transaction. For example, if someone has fire insurance they may be more likely to commit arson to reap the benefits of the insurance.

RELATED TERMS
  1. Contract Theory

    The study of how individuals and businesses construct and develop ...
  2. Third-Party Transaction

    A third-party transaction is a business deal involving a buyer, ...
  3. Asymmetric Volatility Phenomenon ...

    The asymmetric volatility phenomenon (sometimes known as AVP) ...
  4. Overnight Delivery Risk

    The risk that occurs as a result of conducting transactions between ...
  5. Third Party

    An individual or entity that is involved in a transaction but ...
  6. Asymmetrical Distribution

    A situation in which the values of variables occur at irregular ...
Related Articles
  1. Markets

    What Does Asymmetric Information Mean?

    Asymmetric information describes a situation where one party in a transaction knows more than the other.
  2. Personal Finance

    How To Avoid Buying A "Lemon" Product

    A lack of information can lead people into bad purchases and bad investments. Find out how you can avoid these lemons.
  3. Investing

    Moral Hazards: A Bump In The Contract Road

    Learn how this phenomenon can cause a party in an agreement to behave differently than expected.
  4. Managing Wealth

    Asset Manager Ethics: Rules Governing Capital Markets

    The integrity of the capital markets needs to be kept at utmost importance for all investors. This article shows how to maintain the integrity while investing.
  5. Investing

    Arm's Length Transaction

    An arm’s length transaction describes business deals in which the buyer and seller act independently and with no interest in the other’s benefit.
  6. Markets

    What is a Moral Hazard?

    The risk that a party to a transaction has not entered into the contract in good faith, or has provided misleading information.
  7. Investing

    Understanding Related-Party Transactions

    In business, a related-party transaction refers to a transaction where parties on both sides have a common interest or relationship.
  8. Managing Wealth

    What is Adverse Selection?

    Adverse selection occurs when one party in a transaction has more information than the other, especially in insurance and finance-related activities.
  9. Markets

    What is Market Value?

    Market value is the price of an asset that is traded or offered for sale in a public forum where multiple buyers are allowed to make offers to buy that asset.
  10. Trading

    Information Overload: How It Hurts Investors

    There's a fine line between staying informed and being overloaded with financial information.
RELATED FAQS
  1. How do financial market exhibit asymmetric information?

    Understand how financial markets exhibit asymmetric information. Learn how asymmetric information by any party can result ... Read Answer >>
  2. How significant is asymmetric information risk?

    Learn about the presence of asymmetric information risk in the financial markets and how various parties present or are exposed ... Read Answer >>
  3. Do any markets not exhibit asymmetric information?

    Find out why every market possesses information asymmetry, and why this isn't necessarily a huge or insurmountable problem ... Read Answer >>
  4. How can the problem of asymmetric information be overcome?

    Find out how market actors deal with the problem of asymmetric information, particularly when it leads to possible adverse ... Read Answer >>
  5. What is the theory of asymmetric information in economics?

    Read a brief overview of asymmetric information theory in economics, the development of its main arguments and why some challenge ... Read Answer >>
  6. How do notaries reduce asymmetric information risk?

    Find out why notaries exist, why their role is valuable in a market economy and how they counter the risks of asymmetric ... Read Answer >>
Trading Center