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How the Smart Money teaches trading with Ricki Heicklen
Complex Systems with Patrick McKenzie (patio11)
Exploring Adverse Selection in Trading and Capital Allocation
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Adverse selection is a critical concept in trading and capital allocation, emphasizing that the willingness of others to trade with you could indicate potential downsides. It suggests that the apparent profitability of a trade might be overestimated until you consider the perspectives of others in the market. When a trade is placed, particularly in a zero-sum environment, traders must reassess their expectations based on who is willing to engage in the transaction. For startups utilizing crowdfunding, their appeal may stem from prior rejection by venture capitalists and informed investors, indicating potential risk. Crowdfunding doesn't equalize access to high-growth investments, as professionals often outperform amateurs. Ultimately, traders must find reasons to proceed with trades despite adverse selection concerns. This may include being among the first to seize an opportunity when others have not had the chance, but as time goes on and more participants decline similar opportunities, the weight of adverse selection increases, demanding more careful consideration from investors.
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Discover
highlights
Listen to the best highlights from the podcasts you love and dive into the full episode