Adverse Selection

The tendency for the opportunities most available to you to be systematically worse than average, precisely because the better ones were taken by someone with earlier access.

Example

An opportunity being pushed hard with an urgent deadline has usually already been shown to investors who were better placed to judge it and declined.

Important

It is not that widely marketed opportunities are always bad. It is that the ones needing the most persuasion are drawn from a worse pool, so urgency should lower your prior rather than raise it.

Related terms

Deal Flow — The stream of investment opportunities that reach an investor, across every channel they arrive through.
Disqualifying Question — The single question, derived from your thesis, whose wrong answer ends the conversation regardless of everything else about the opportunity.
Due diligence — The work of independently verifying the claims made about an investment before committing money to it - the documents, the counterparties, the registrations and the numbers.

Lessons that explain it

In private markets, who you know decides what you see — Private companies are not listed anywhere. Networks determine the deals an investor hears about, the quality of diligence they can do and whether founders choose them. (9 min)
The best opportunities are rarely the ones being shown to everyone — Deal flow is not one thing. It arrives through channels with very different quality, and the channel an opportunity came through tells you something before you have read a word of it. (10 min)
Why what comes to you is a biased sample — The opportunities that push hardest for your attention are drawn from a worse pool than the ones that do not need to push, and urgency is the tell. (9 min)
The first forty minutes decide the next forty hours — A thesis is only worth writing if it changes what you do at intake. This is the mechanics of applying it fast enough to protect the time it was meant to protect. (13 min)

All 578 terms in the Investing glossary