Adverse selection refers to the fact that in market transactions, if one party can use more information than the other party to make profits for itself, and the other party is damaged, it is difficult to make a successful decision on buying and selling because of the information disadvantage, so the price will be distorted, which will lose the role of balancing supply and demand and promoting transactions, thus leading to the reduction of market efficiency.
There are many examples of adverse selection in finance, and the most typical one is Gresham's law that bad money drives out good money. Gresham's law refers to the existence of official price comparison and market price comparison under the dual standard system of gold and silver. Because the official price elasticity is small and the market price elasticity is large, the currency (good currency) whose market value is lower than the official price elasticity will withdraw from circulation, and the market is full of bad money.