Imagine this! You just went to buy a car from a dealer. You got your specifications met and have just purchased it. You feel great while driving back. But suddenly, the car just stopped working. You get out to see what happened. To your dismay, you see there is a massive oil leak. You look around and see that the leakage area has rust written all over it. And now you feel bad. Well let me tell you, you just have become a victim of what we call in Economics, Adverse Selection.
In simple terms, Adverse selection is when the seller has more information about the product than the buyer. In your case, it was the rusted portion causing the oil leak in your newly purchased car. Now, you might be wondering, why would this happen to you? Well, to be honest, you are not alone. It is estimated that all over the world, the used car market has a size of almost $1700 billion. There is someone like you suffering from the same problem as you did. You might also be wondering why would this happen to anyone in general. Well, it all comes down to information. You see, humans are wired to believe what they are told is good. Our minds are always on the lookout for the good things that are being told to us. It is this little tweak that the sellers use to trick the buyers into buying the product. Let’s take your case again.
You had a certain specification in mind before buying the car. Interestingly you were given 2 car choices, both with your required specifications. It is true that the seller definitely knows which would be the better option between the two. Now, his strategy would be to sell you the worse one out of the two. Why? Because he wants to. If you notice carefully, he would be very subtle with giving compliments to the worse one. At the same time, he would also justify why that car suits you better. In the end, all that matters to him is earning profit from the sale, so he will be pushing you to take a decision hoping that all those complements and justifications work. And you know what’s the best thing about this, even if you choose the better option he wouldn’t care. This is because he knows that there are other customers who will fall for his tricks.
Read another article here: The Netflix Effect.
So, how can you avoid this? Well, there are several ways by which you can avoid being a victim of Adverse Selection. One of the best ways is to read the documents about the car carefully before deciding. Secondly, you can request a test drive before making a decision. Test drives often help you understand the flaws with the car. Thirdly, you can do a visual inspection of the car by yourself or by a third party person (provided the seller agrees). One of the best ways to not fall for the trap in my opinion is to question every compliment and justification that the seller is giving to you in your mind. That way you will be able to understand his thought process before making a decision. I am sure buying a car now won’t be much of a hassle anymore. And who knows, you might just choose the best possible option after reading this post.
Do check out this article about Diversity in population: Gift or Curse?
I am so happy to be back, writing. I know it has been quite some time I wrote a blog. I will be honest; I didn’t have any motivation to write much. I haven’t been active on Twitter either. But, I am back and I will try and post every weekend. If you enjoyed reading this post, a like would be awesome. Comment below your thoughts on the car market and let me know in the comments section if you or anyone you know has become a victim of this. Let me hear your stories! If you are new here, do drop a follow. Also, a very happy new year to everyone. You can now follow me on Twitter as well. Stay tuned for more posts by The Antique Economist.