Moral Hazard
Moral hazard is a concept in economics, insurance, and risk management that states that when a person or entity is protected from the consequences of their actions, they are more likely to take risks. This can lead to a situation where the person or entity is more likely to take risks than they would if they were not protected. For example, if a person has health insurance, they may be more likely to engage in risky activities such as smoking or drinking, because they know that their health insurance will cover any medical costs that may arise from their risky behavior.
History of Moral Hazard
The concept of moral hazard has been around since the 18th century, when it was first used to describe the behavior of people who were insured against losses. The term was first used in the context of insurance by the British economist Henry Thornton in 1803. Since then, the concept has been applied to a variety of situations, including banking, finance, and risk management. In the banking industry, moral hazard is used to describe the risk that a bank may take on more risk than it can handle, because it knows that it will be bailed out by the government if it fails.
Table of Comparisons
| Situation | Risk of Moral Hazard |
|---|---|
| Insurance | High |
| Banking | Medium |
| Finance | Low |
Summary
Moral hazard is a concept in economics, insurance, and risk management that states that when a person or entity is protected from the consequences of their actions, they are more likely to take risks. This can lead to a situation where the person or entity is more likely to take risks than they would if they were not protected. For more information on moral hazard, you can visit websites such as Investopedia, The Balance, and the Federal Reserve Bank of St. Louis.
See Also
- Risk Aversion
- Adverse Selection
- Principal-Agent Problem
- Game Theory
- Risk Management
- Insurance
- Financial Regulation
- Financial Risk
- Financial Crisis
- Systemic Risk
