Which of the following actions best illustrates adverse selection?
A)A person adds risky stock to his portfolio.
B)A person who has narrowly avoided many accidents applies for automobile insurance.
C)A person is unwilling to buy a stock when she believes its price has an equal chance of rising or falling $10.
D)A person purchases homeowners insurance and then checks his smoke detector batteries less frequently.

Question

Quizplus · Accepted Answer

Adverse selection occurs when individuals with higher risk are more likely to purchase insurance. In this scenario, the person who has narrowly avoided many accidents is likely at higher risk of getting into an accident, making the insurance company more likely to pay out a claim. Therefore, their application for automobile insurance represents adverse selection. 
The other options do not represent adverse selection - A is an example of risk-taking behavior, C is a personal choice about buying stocks, and D is an example of moral hazard (a separate concept from adverse selection).

Which of the Following Actions Best Illustrates Adverse Selection