Imperfect information

Imperfect information is the condition that occurs in the market when one or more traders have more precise information than others. This concept is therefore studied in economics, and is directly applicable to business scenarios, where the presence of information asymmetries is useful for explaining the different behaviors of the various economic subjects.

When information is not fully shared among the subjects who are part of the same economic process, we can therefore speak of imperfect information. And therefore a part of the interested parties has more information than the rest of the participants and can thus benefit from this situation.

There are many situations in which imperfect information occurs, but they can almost all be grouped into these 3 cases:

Adverse selection Reporting and selection Moral hazard

Adverse selection

Adverse selection is a classic example of information asymmetry that mainly affects the insurance sector.

In fact, in quantifying the price of the policy, insurance companies start from a lack of knowledge of the actual possibility that the event that is then the subject of a reimbursement request will occur. The cost of the policy is therefore established on an estimate of the average cost of the damaging event. Therefore, insurance companies find themselves in a condition of information asymmetry with respect to their customers, who are instead more aware of their degree of risk of the insured object.