Thursday, June 20, 2013

Moral Hazard Succinctly Defined

"Let me watch over you tonight."
--Claire Gregory (Someone to Watch Over Me)

A quick post to capture this nice definition of moral hazard:

"Moral hazard is the separation of risk from consequence."

About as succinct as it gets. People behave differently when they feel that they will not face negative consequences of their actions. If they perceive their behavior as being insured, then people will take more risk.

One way to visualize the transmission mechanism of the massive intervention in world markets is as an air pump that has blown a gigantic bubble in moral hazard around the globe.

1 comment:

dgeorge12358 said...

A smooth sea never made a skillful mariner.
~author unknown