Asymmetric Information

Loading the player...

DEFINITION of 'Asymmetric Information'

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. Information Silo

    An information management system that is unable to freely communicate ...
  2. Mechanism Design Theory

    An economic theory that seeks to determine the situations in ...
  3. William Vickrey

    A Canadian economist who won the Nobel Prize in Economics in ...
  4. Material News

    News released by a company that might affect the value of its ...
  5. Conference Call

    An event during which investors can call in to hear a company's ...
  6. Insider Information

    A non-public fact regarding the plans or condition of a publicly ...
Related Articles
  1. Economics

    What Does Asymmetric Information Mean?

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

    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 Basics

    The Importance Of Corporate Transparency

    Clear and honest financial statements not only reflect value, they also help ensure it.
  4. Investing Basics

    What Is The Impact Of Research On Stock Prices?

    The answer to this question is directly related to the importance of information in the marketplace.
  5. Economics

    Defining Illegal Insider Trading

    The better you understand why insider trading can be criminal, the better you'll understand how the market works.
  6. Professionals

    Conference Call Basics

    These group calls offer investors a chance to hear management respond to analysts' hard-hitting questions.
  7. Active Trading

    Should You Be Afraid Of Dark Pool Liquidity?

    Don't fear the deep end. Dark pool liquidity can help drive down stock cost for everyday investors.
  8. Options & Futures

    Moral Hazards: A Bump In The Contract Road

    Learn how this phenomenon can cause a party in an agreement to behave differently than expected.
  9. Active Trading Fundamentals

    Mad Money ... Mad Market?

    Jim Cramer's spirited recommendations are a case study in irrational market behavior.
  10. Your Practice

    Advisors: Win Over Millennials with Insurance

    Millennials don’t have the same values and goals as previous generations. Here are some tips on how advisors can adapt to their needs and wants.
RELATED FAQS
  1. How can I profit from monitoring open interest?

    Since markets experience asymmetric information between parties, monitor whether there is an imbalance between the open interest ... Read Full Answer >>
  2. Why is moral hazard so prevalent in the financial services industry?

    Moral hazard tends to be prevalent in the financial services industry due to the nature of the industry, temptation and greed, ... Read Full Answer >>
  3. How do financial market exhibit asymmetric information?

    Financial markets exhibit asymmetric information in that in a financial transaction, one of the two parties involved will ... Read Full Answer >>
  4. What are the most effective ways to reduce moral hazard?

    There are a number of ways to reduce moral hazard, including the offering of incentives, policies to prevent immoral behavior ... Read Full Answer >>
  5. What is the difference between moral hazard and adverse selection?

    Adverse selection occurs when there's a lack of symmetric information prior to a deal between a buyer and a seller, whereas ... Read Full Answer >>
  6. What is the theory of asymmetric information in economics?

    The theory of asymmetric information was developed in the 1970s and 1980s as a plausible explanation for common phenomena ... Read Full Answer >>
  7. How significant is asymmetric information risk?

    Asymmetric information risk is ever present in financial markets and can represent a very significant factor. Asymmetric ... Read Full Answer >>
  8. How do notaries reduce asymmetric information risk?

    A notary acts as an intermediary who can help mitigate the problems caused by asymmetric information in economic transactions. ... Read Full Answer >>
  9. What is the difference between adverse selection and moral hazard?

    In economics, moral hazard and adverse selection are two possible consequences of asymmetric information or ineffective information ... Read Full Answer >>
  10. How does adverse selection affect insurance premiums?

    Any limits on an insurance provider's ability to appropriately price risk – to economize on important information – might ... Read Full Answer >>
  11. How do modern corporations deal with agency problems?

    Agency problems – also known as principal-agent problems or asymmetric information-driven conflicts of interest – are inherent ... Read Full Answer >>
Hot Definitions
  1. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  2. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  3. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  4. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  5. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
Trading Center