what is asymmetric information 
asymmetric information also known as information failure occurs when one party to an economic transaction possesses greater material knowledge than the other party this typically manifests when the seller of a good or service possesses greater knowledge than the buyer however the reverse dynamic is also possible almost all economic transactions involve information asymmetries investopedia nono floresunderstanding asymmetric informationasymmetric information exists in certain deals with a seller and a buyer whereby one party is able to take advantage of another this is usually the case in the sale of an item for example if a homeowner wanted to sell their house they would have more information about the house than the buyer they might know some floorboards are creaky the home gets too cold in winter or that the neighbors are too loud information that the buyer would not know until after they purchased the house the buyer then might feel they paid too much for the house or would not have purchased it at all if they had this information beforehand asymmetric information can also be viewed as the specialization and division of knowledge as applied to any economic trade for example doctors typically know more about medical practices than their patients after all physicians have extensive medical school educational backgrounds that their patients generally don t have this principle equally applies to architects teachers police officers attorneys engineers fitness instructors and other trained professionals asymmetric information therefore is most often beneficial to an economy and a society in increasing efficiency advantages and disadvantages of asymmetric informationasymmetric information isn t necessarily a bad thing in fact growing asymmetrical information is the desired outcome of a healthy market economy as workers strive to become increasingly specialized in their chosen fields they become more productive and can consequently provide greater value to workers in other fields for example a stockbroker s knowledge is more valuable to a non investment professional such as a farmer who may be interested in confidently trading stocks to prepare for retirement on the flip side the stockbroker does not need to know how to grow crops or tend to livestock to feed themself but rather can purchase the items from a grocery store that are provided by the farmer in each of their respective trades both the farmer and the stockbroker hold superior knowledge over the other but both benefit from the trade and the division of labor one alternative to ever expanding asymmetric information is for workers to study all fields rather than specialize in fields where they can provide the most value however this is an impractical solution with high opportunity costs and potentially lower aggregate outputs which would lower standards of living in some circumstances asymmetric information may have near fraudulent consequences such as adverse selection which describes a phenomenon where an insurance company encounters the probability of extreme loss due to a risk that was not divulged at the time of a policy s sale in certain asymmetric information models one party can retaliate for contract breaches while the other party cannot for example if the insured hides the fact that they re a heavy smoker and frequently engage in dangerous recreational activities this asymmetrical flow of information constitutes adverse selection and could raise insurance premiums for all customers forcing the healthy to withdraw the solution is for life insurance providers to perform thorough actuarial work and conduct detailed health screenings and then charge different premiums to customers based on their honestly disclosed risk profiles special considerationsto prevent abuse of customers or clients by finance specialists financial markets often rely on reputation mechanisms financial advisors and fund companies that prove to be the most honest and effective stewards of their client s assets tend to gain clients while dishonest or ineffective agents tend to lose clients face legal damages or both 