Why knowing more than the other person can trigger a financial disaster
In short: Information gaps often create dangerous market imbalances. Raghavendra Rau examines how hidden knowledge leads to adverse selection and moral hazard, explaining why well-intentioned regulations sometimes backfire and trigger systemic crises in insurance and credit sectors.
In this lecture, recorded on January 20, 2025, at Barnard's Inn Hall in London, Raghavendra Rau explores the mechanics of information asymmetry. When one party in a transaction holds superior knowledge, it can distort market outcomes, leading to situations where the wrong risks are selected or individuals act recklessly because they are shielded from the consequences of their behavior.
Rau, who holds a prestigious finance chair at the Cambridge Judge Business School, argues that regulatory interventions designed to mitigate these risks can inadvertently worsen them. By analyzing the interplay between information, regulation, and market stability, the lecture highlights how these dynamics can escalate into broader financial catastrophes.
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- Summary by Intellect · source: The Hidden Risks of "I Know Something You Don't" - Raghavendra Rau
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