Hello everyone
I want to talk about moral hazard.
Moral hazard has the whiff of something terribly judgemental—probably invented by the Victorians—and almost certainly with sexual connotations. It may have that whiff, and it is an old notion, having its origins in the 17th century, but it is actually a term used by economists.
What is Moral Hazard?
You will be aware of moral hazard, even if you’re unfamiliar with the term.
Moral hazard is the situation where:
- someone can act—and in particular, someone can take a risk
- but that person does not bear the full consequences for that action—in particular, they do not bear the financial consequences for that action
So, an over-simplified example might be when the kids leave the lights on, but their parents pay the electricity bill.
In short, moral hazard is all about risk and responsibility. Looked at another way, the notion can make some really compelling characters.
Lack of Consequence
The first element of moral hazard is the lack of consequence for any action.
The lack of consequence can, in effect, remove any inhibitions for the person who takes action. Removing consequences is almost akin to giving someone superpowers. They don’t need to think, they can just act…because, well, there are no consequences.
But the situation is more than a simple lack of consequence for the person taking the action. For there to be moral hazard, there has to be someone for whom there is a consequence.
And the person who suffers the consequence has a choice—they could stop themselves suffering the consequence. It may not be simple to protect themselves, but the decision not to protect themselves from another’s behavior is a choice.
In other words, if someone allows another to act without consequence, they are enabling the situation. And in making this choice, it is the enabler who, in effect, is giving that other person superpowers.
Risk Takers
Moral hazard has its origins in the insurance market. One concern (for the insurers) was whether providing insurance (in other words, reducing the potential financial consequences of an action) was encouraging risk taking, and in particular, whether providing insurance was encouraging extreme risk taking.
In short: were people taking more risks because they were protected against the financial downsides of those risks?
The Enabler
So why does the person I’m calling the enabler, enable?
In the insurance context, the answer is obvious: the enabler (the insurer) will make money (or will hope to do so).
And that principle applies for other situations. The enabler will enable because there is a benefit to them.
Let’s take another example: a parent lends a (teenage or young adult) child a car. This enables the child to behave in a reckless manner—the child may drive too fast, drive without due care, drive under the influence of alcohol, or undertake any number of other risky behaviors.
None of these behaviors would be possible without the parent lending the car. But the alternative—maybe public transport, maybe accepting a lift from another child—could be riskier for the child, so the parent will seek to protect. A very natural urge.
Now obviously, there are nuances and negotiations—the parent is always going to make a deal (implicit or explicit) with the child that the child will be “careful”.
But staying with this example, the parent may also choose to take the risk with their car (and lend it to the child) because they know there is insurance, and therefore their financial loss occasioned by the child’s recklessness would be limited. In other words, one moral hazard (the insurance) may lead to another moral hazard (the parent lending the car).
Why the Interest?
So why am I, a novelist, writing about somewhat obscure insurance and economics principles?
The simple answer is—as I said earlier—because when I look at moral hazard in the context of my characters, I soon have to think about how tolerant characters are to risks and whether a character will take responsibility for their actions (and if they will, what that responsibility looks like).
The less simple answer is, that looking at situations where one character takes away responsibility and consequence from another, very quickly creates a complex and multi-layered dilemma with many competing interests. And there is a very plausible possibility that a good intention can swiftly move to a terrible outcome that no one can control.
But perhaps the most interesting element of this complexity is the enabler. On one hand, they can seem benevolent, acting to help another. But so often the reality is they are acting in their own self interest. And there’s a strong argument that rather than being benevolent, they are actually putting their own (controlling) interests ahead of the interests of the person who they are enabling to the detriment of that person. By taking away responsibility, they are taking away failure and the opportunity to learn and grow.
Until May
That’s me for this month. I’ll be back in May.
Until then, keep an eye out for moral hazard and the enabling of bad behavior.
All the best
Simon