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Zillow tried using its “iBuying” algorithm to purchase houses that they thought they could flip and profit from. What happened next was an economic disaster: hundreds of millions of dollars in losses, a 40% drop in their stock price, and a staff reduction of 25%. Where did Zillow go wrong? And are all such algorithms doomed to fail?

This video explores a principle known as adverse selection, sometimes also referred to as a market for lemons. When a seller has private information about the quality of a good for sale, it can cause significant market inefficiencies. If algorithms only make decisions based on publicly observable information, the situations where they can turn a profit are limited.

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