Business
What is Moral hazard?
Moral hazard is when someone takes bigger risks because they don't bear the full consequences. If a safety net catches their losses, people and companies tend to behave more recklessly than they otherwise would.
See it, don’t just read it.
Watch a 2-minute lesson with voice + animation that explains moral hazard.
Key things to understand
- 1It arises when one party is shielded from the cost of their risks.
- 2Being protected encourages riskier behavior.
- 3Example: a bank may gamble more if it expects a bailout.
- 4Insurance can cause it, so insurers use deductibles to curb it.
- 5It's a central issue in finance, insurance, and policy.
Frequently asked questions
- What is an example of moral hazard?
- A driver with full insurance may park less carefully, since the insurer — not them — pays for a dent or theft.
- Why is moral hazard a problem in banking?
- If banks expect governments to bail them out, they may take reckless risks, knowing the downside falls on taxpayers.
- How do you reduce moral hazard?
- By making people share in the risk — deductibles, co-pays, or letting failing firms bear real consequences.