Which of the following actions best illustrates adverse selection?
A)After Nalah purchases insurance, she has less incentive to be careful.
B)James knows he is a reckless driver and so he applies for automobile insurance.
C)Xavier dislikes losing $400 more than he likes winning $400.
D)A person is unwilling to buy a stock when she believes its price has an equal change of rising or falling $10.

Question

Quizplus · Accepted Answer

Adverse selection occurs when one party in a transaction has more information than the other, typically in insurance or financial markets. In this case, James knows he is a reckless driver, which is information not known to the insurance company. This knowledge influences his decision to apply for automobile insurance, potentially leading to a higher risk for the insurance company.

Which of the Following Actions Best Illustrates Adverse Selection