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Explain what you understand by the term "asymmetric information" and outline why it is an important concept to finance.
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Explain what you understand by the term "asymmetric information" and outline why it is an important concept to finance. The definition of asymmetric information can be as simple as to say the disequilibrium of knowledge between one party and another. The definition allows us to assume that one party becomes better off, due to the opposing party being worse off. In terms of finance, the relationship we talk about is that of the lenders versus the borrowers. The lenders have more information than the borrowers as they are experts in the respective field, and have the equipment and power to be able to obtain such information. For example, in financial intermediaries they acquire such knowledge to assess the risk of lending, in reverence to receiving the money back. Asymmetric information provides a theoretical and practical basis to economic and financial issues, and due to its huge implications to the financial...
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