00:01
So adverse selection is an economic phenomena where incentives usually caused by access to special information causes bad antisocial or wrong behavior, not the behavior that we're hoping to encourage.
00:16
The classic example here is the used cars, right? if i have a crummy used car that breaks down all the time, i'm going to be more likely to sell it because, i don't want a crummy used car.
00:33
That means that the pool of used cars that available is worse than you expect because the pool of used cars has attracted lots of bad cars because the people who know their cars are bad are more likely to get rid of them and the people who know their cars are well constructed are more likely to keep them, right? so you've got this social outcome that used cars are crumbier than you expect because the market for used cars is selecting adversely for people who know their car is bad and wants to get rid of it.
01:06
So one, the military pays more for quality.
01:08
There's nothing adverse here.
01:10
This is actually what you want, right? this is sort of normal selection.
01:14
You want more qualified people.
01:16
You pay them more, right? that's nothing.
01:20
Now, yes, when you pay more for quality, you're going to get more applicants of good and bad, but this is what you want.
01:26
You're trying to attract more good people, right? b, insurance dodge is sick people.
01:33
This is exactly adverse selection.
01:35
We would like everyone to get medical insurance, but the insurance company says, look, i know that some people are healthy and i know some people are sick, and i know that the sick people are really going to cost the insurance company more than the healthy people.
01:50
Unfortunately, i don't know which types of sick people are out there, so i'm just going to try to exclude everyone who's sick of any sort, right? so we are kicking people out of this pool, the insurance company is incentivized only to select the people who are healthy...