Adverse selection: Difference between revisions
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imported>Doug Williamson m (Clarify wording by adding "new".) |
imported>Doug Williamson (Link with Anti-selection page.) |
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For example using a cost of capital which is either too low or too high, because of failing to take appropriate account of the relevant risk of the project under review. This can happen when a firm's existing average cost of capital is used to evaluate new projects whose risk differs from the average risk of the firm's existing business. | For example using a cost of capital which is either too low or too high, because of failing to take appropriate account of the relevant risk of the project under review. This can happen when a firm's existing average cost of capital is used to evaluate new projects whose risk differs from the average risk of the firm's existing business. | ||
Adverse selection is not to be confused with ''anti-selection'', which is different. | |||
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* [[Project appraisal]] | * [[Project appraisal]] | ||
* [[Weighted average cost of capital]] | * [[Weighted average cost of capital]] | ||
* [[Anti-selection]] | |||
Revision as of 16:21, 22 November 2014
Project appraisal.
The problems of accepting projects which should be rejected, or rejecting ones which should be accepted.
One cause of adverse selection is using the wrong cost of capital for making the evaluation.
For example using a cost of capital which is either too low or too high, because of failing to take appropriate account of the relevant risk of the project under review. This can happen when a firm's existing average cost of capital is used to evaluate new projects whose risk differs from the average risk of the firm's existing business.
Adverse selection is not to be confused with anti-selection, which is different.
