An investor who wants to invest in only one start-up business is trying to decide between two new businesses. The entrepreneurs in both businesses seem quite similar to the investor. However,they are not similar. One has much better skills than the other,who is misrepresenting his skills. The investor is facing the situation known as
A) equity apprehension.
B) breakeven syndrome.
C) adverse selection.
D) covenants.
E) cash flow condition.

Question

Quizplus · Accepted Answer

The situation described in the scenario is an example of adverse selection. Adverse selection is the phenomenon where one party in a transaction has more information than the other party, resulting in the less-informed party making a less-than-optimal decision. In this case, the entrepreneur who is misrepresenting their skills is the less-informed party, and the investor is at risk of making a poor investment decision.

An Investor Who Wants to Invest in Only One Start-Up