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Adverse Selection Risk
Definition
This is the risk associated with making decisions without all available choices or information. Within the context of trading, this is the risk of trading with a more informed trader, i.e. they know more than you do about a security.
Using the term Adverse Selection Risk :
Without having the information available to all participants in a trade or deal, you are at a decided disadvantage. While you may not always be able to access all information given time or other constraints, you should ensure you at least have the same material information that your competitor or counterparty possesses.
Pay Special Attention To :
If there is a large market for a product, but you only have limited choices available to you, by definition you may be facing a high level of adverse selection risk. Proceed carefully or do not proceed at all until more information and choice is available. As Warren Buffett once said -- "You don't have to swing at every pitch."
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