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by mspecter 2613 days ago
A moral hazard happens when an entity is somehow insured against something (e.g. health insurance), so is rationally more likely to behave in some "bad" way (e.g. driving recklessly).

I'm not seeing how this a moral hazard, do you just mean "immoral"?
2 comments
zwkrt 2613 days ago
"Insured" can be interpreted very broadly; moral hazard is whenever the negative outcomes of a risky decision are directed away from oneself. A CEO considering the option of a layoff is a moral hazard as she will make her board happy at the expense of her employees. Either way she has nothing to lose.
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mspecter 2613 days ago
>"Insured" can be interpreted very broadly; moral hazard is whenever the negative outcomes of a risky decision are directed away from oneself.

Nope! That's called an externality. A moral hazard is a type of externality, but is very focused on a particular set of instances in the definition I provided.

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ABCLAW 2613 days ago
My comment used the term in the exact manner described by the comment you're replying to, to describe a state of affairs whereby incentives are systemically perverse because risk is not properly allocated.

A recent review I looked through indicates that the term has been historically used for different purposes in economics, insurance and probability literature. If the language of externalities is easier to understand for you, feel free to mentally substitute it in.

I could have couched the comment in the language of externalities and made a similar point, but it would lose the rhetorical flourish of hinting that legislatures themselves discount risk associated with their actions (or lack thereof).

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matt4077 2613 days ago
It’s a somewhat stupid example, because nobody endangers their own life just because they have health insurance.

Smoking instead of reckless driving may make it (slightly) more understandable.

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mspecter 2613 days ago
Sure, though, to be pedantic, a common example of moral hazard is the increased likelihood of driving recklessly in the presence of mandatory seat belts. See https://web.stanford.edu/~leinav/pubs/RESTAT2003.pdf
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matt4077 2612 days ago
That’s not a moral hazard. The word doesn’t even appear in the paper. It’s just an example of somewhat efficiently choosing a different point on the risk/reward continuum when the payoffs change.

A moral hazard is choosing a selfish course of action with negative external effects.

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