Adverse selection
Etymology
The phrase comes from the insurance industry, where "select" is a technical verb for choosing whom to cover; an "adverse" selection is one that runs against the insurer’s interest. Its economic backbone came from George Akerlof’s 1970 paper "The Market for Lemons," which showed how hidden quality can unravel a market entirely. The term now applies well beyond insurance, to hiring, lending, and dating alike.
noun phrase · /AD-vurs sih-LEK-shun/
The market failure that occurs when the side of a deal with hidden information self-selects in ways that stick the other side with the worst risks.
What it names
Why the people most eager to buy insurance are often exactly the ones you least want to insure — a pattern that quietly poisons any market where one party knows more than the other before the deal is struck.
Example
Offer unusually generous return policies and you may trigger adverse selection, attracting exactly the customers who intend to abuse them.
Related idea
Moral hazard is about hidden action after a deal — behaving recklessly once insured; adverse selection is about hidden information before the deal — who signs up in the first place.