Adverse Selection is asymmetric information attracts the worst counterparties. It sits in the Cognition dimension (COG) of the Human Behavior Taxonomy™ as element HBT-COG-0016, within the Economics family. The core principle: asymmetric information attracts the worst counterparties. In incentive terms, it matters because it changes the payoff people perceive before they choose — which means it can be designed for, or exploited.
Scientific Definition
Asymmetric information attracts the worst counterparties.
Plain-English Definition
Asymmetric information attracts the worst counterparties.
Feynman Explanation
If only the desperate buy your insurance, you have a pricing problem.
Core Principle
Asymmetric information attracts the worst counterparties.
Mechanisms
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Inputs (Triggers)
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Outputs (Behaviors)
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Behavioral Signature
If only the desperate buy your insurance, you have a pricing problem.
Examples
- Health plans that don't screen end up insuring the sickest pool.
- Loose qualification criteria recruit exactly the customers you can't profitably serve.
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Original analysis from The Incentives Lab — how this element behaves inside real payoff structures.
Why this element matters to incentive design
This is one of the elements leaders describe as a values gap. It is a payoff gap. The mechanism underneath it operates in the Cognition dimension — how do we think?. You can recognize it in the field by its signature: if only the desperate buy your insurance, you have a pricing problem. Every element in the Cognition dimension changes the perceived payoff of an action before the action happens, which is exactly where incentive design has leverage.
How it gets exploited
Left undesigned, open APIs without rate limits attract scrapers, not customers. It is amplified whenever loose qualification criteria recruit exactly the customers you can't profitably serve. Inside organizations that shows up as loose qualification criteria recruit exactly the customers you can't profitably serve. The pattern is the same one Goodhart's Law describes: the measurable proxy attracts the effort, and the purpose behind it quietly loses funding.
How the Lab designs around it
The redesign move is to use signals (screens, deposits, references) that good counterparties will pay. Design against it the way you would design against a known failure mode — assume it will appear, and price the exploit before someone finds it.
Famous Experiments
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Design Principles
- Use signals (screens, deposits, references) that good counterparties will pay.
Measurement Approaches
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Evidence
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The Perverse Incentive Lens™
How this behavior is exploited — and how to redesign around it.
- Use signals (screens, deposits, references) that good counterparties will pay.
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Pending editorial review.
Interactive Mini Network
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Knowledge Graph Neighbors
Auto-linked to the rest of the Human Behavior Taxonomy by family, domain, dimension, and shared keywords.
Signals whose value depends on being expensive to fake.
A cost or benefit borne by someone outside the transaction.
Costly actions that credibly communicate hard-to-observe traits.
Behavior that benefits genetic relatives at cost to oneself.
Clear ownership of outcomes, not just tasks.
We defer to perceived expertise, rank, or uniform.
Vastness that exceeds existing schemas dissolves the self briefly.
Negative feedback returns a system toward a target.
Membership in a group is a baseline human need.
Individually rational choices that produce a collectively bad outcome.
We seek tasks where we feel effective and improving.
Competing loyalties that compromise judgment.
Where Adverse Selection is cited in the corpus
Essays, field guides, and diagnostics from The Incentives Lab that apply this element.
- EssayGoodhart's Law in the Real World
How measurable proxies capture judgment.
- EssayThe Perverse Incentives Hiding in Your KPIs
Cognitive shortcuts turned into scorecards.
- CourseIncentives 101
The free ten-part primer on reading a payoff structure.
- ReferenceThe Periodic Table of Human Behavior
The full 1,267-element map this page belongs to.
Questions about Adverse Selection
- What is Adverse Selection?
- Adverse Selection is asymmetric information attracts the worst counterparties. It sits in the Cognition dimension (COG) of the Human Behavior Taxonomy™ as element HBT-COG-0016, within the Economics family. The core principle: asymmetric information attracts the worst counterparties. In incentive terms, it matters because it changes the payoff people perceive before they choose — which means it can be designed for, or exploited.
- What is an example of Adverse Selection?
- Loose qualification criteria recruit exactly the customers you can't profitably serve. The Incentives Lab catalogs everyday, organizational, and historical instances of this element on its Human Behavior Taxonomy™ page (HBT-COG-0016).
- How is Adverse Selection exploited?
- Open APIs without rate limits attract scrapers, not customers.
- How do you design around Adverse Selection?
- Use signals (screens, deposits, references) that good counterparties will pay.
- Which behavioral dimension does Adverse Selection belong to?
- Adverse Selection is classified in the Cognition dimension (COG) of the Human Behavior Taxonomy™, family "Economics", class "Concept". Its permanent identifier is HBT-COG-0016 and its evidence grade is C.