Talk:Moral hazard

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—64.252.166.207 21:39, 29 December 2006 (UTC) Two additional examples I'd like to submit for review relate to the tobacco industry and the utility industry. Tobacco companies have inflicted direct costs on the health care system for years and have escaped the 'true' burden of these costs. And utility companies have contributed to global warming and pollution that have led to costly 'cleanup' efforts and health problems. And like the tobacco companies, they have not had to bear the costs resulting from their direct actions. The developing CO2 market is an attempt to capture a portion of these costs and reward positive behavior. 64.252.166.207 21:39, 29 December 2006 (UTC)


Contents

[edit] Arson

"Many, perhaps most, police investigations of arson are the result of leads from suspicious insurance adjusters." I'm curious - where was this taken from? I'm not doubting its validity, just pondering upon the origins of its source.


I do not understand. Please give an example of a moral hazard.

Re: "It could be argued along the same lines that military spending increases the risk of war." I don't see this logic, and don't see how it fits under moral hazard. It would make sense if (a) the military was given money based on how many wars it fought, and (b) it was the military which decided whether to go to war. But (a) is not what is said-- it's not military spending that matters, but rather the tying of spending to war (in the same way that welfare is tied to number of children); to illustrate, even if military spending were presently zero, the incentive for war would exist. As for (b), it is just false. The military is given orders by the government, not vice versa. The exception would be the case of a military gov't, but in that case it pretty much can take as much money as it wants anyway. Perhaps one could argue that the military once deployed might try to provoke a greater conflict to get more money, though this really seems a stretch. I think this example needs to be struck or greatly retooled. -- VV 21:39, 19 Sep 2003 (UTC)

The purchase of weapons is a sunk cost that removes or reduces one disincentive to belligerent and provocative behaviour. We got all of these bombs and guns lying around. Do we just let 'em rust, or do we shoot something? OTOH, if they weren't already stockpiled, they would have to first be acquired before a belligerent plan could be carried out. So even if the army is not paid on a piecework basis, and even if it is civilian leaders who decide whether to go to war or not, the purchase of weapons still creates a moral hazard of warlike activity. -- Smerdis of Tlön 23:53, 19 Sep 2003 (UTC)

I agree that the military example is misleading. Military expenditure facilities perverse behaviour, but doesn't induce it. I think the induce ment is the critical component of moral hazard. -- RyanCastle

^ That's so incorrect on a number of levels.

[edit] One line examples of moral hazards

A Glazier who pays someone to smash windows, thus creating business for the Glazier.

Joe drives very carefully since he is uninsured, after he buys insurance he drives very recklessly since he knows the insurance will pay for damages.

[edit] Antipattern?

I think moral hazard qualifies as an Anti-pattern. If consensus agrees, MH should be added as a list item there. (But is it organizational or social? Sometimes both. Sometimes even related to computer programming. *s*) This page should be added to the Category:Anti-patterns. Any other opinions? PhilipR 16:23, 14 February 2006 (UTC)

So ordered. No one objected. - PhilipR 01:21, 28 November 2006 (UTC)

[edit] moral hazard vs morale hazard

In the insurance field, morale hazard can better be seperated from moral hazard, according to a textbook written by Rejda, George E., Principles of Risk Management and Insurance.

Moral hazard refers to dishonesty. For an example taken from the article, if someone is operating a failing business and decides that they'd rather have the cash from the insurance proceeds on the buildings, the term moral hazard is used.

morale hazard refers to carelessness due to presence of insurance protection. Example taken from the article would be automobile driver (with insurance protection) drive less cautiously.

[edit] How is this a problem?

I am very perplexed when I see morale hazard used to support an increase in insurance costs. The argument I've heard is that if you have fire insurance, you're not going to do as much as you could to prevent your house from burning down. We're not talking about arson or some other insurance fraud. Those are extremes activities that are punished in other ways. The argument as stated makes no sense to me because that seems to be what an insurance company is selling: peace of mind. At least that's what their ads target (besides the fact that they're required by law). But if the economics is calculated out to be a perfect transaction (the insurer is paid the cost of the insured risk times the chance of the risk occurring) there is no reason for the insured to pay more than that, which is the extra amount insurance currently charge to make money (otherwise, in the grand scheme of things, the perfect transaction would only allow the insurer to break even). The extra money is being paid for the peace of mind. So you don't go absolutely nuts when the house you took a lifetime to buy burns to the ground. There is already a compulsion to avoid the disaster: besides the horror of seeing your worldly possessions go up in flames, not to mention the risk to life, there are the externalities that the insured loses out of pocket. If someone can help me figure out how morale hazard is a problem for insurance companies, I would be really grateful.

[edit] Other names

Are moral hazards the same thing as "perverse incentive"s? --maru (talk) contribs 01:20, 8 July 2006 (UTC)

I don't think so. My sense is that perverse incentives result in behavior OTHER THAN what the incentive is trying to affect (e.g., paying people based on the number of employees supervised leads to opposition to automation); a moral hazard is where a contract that involves an anticipated behavior of one party (like wanting to protect one's business from disasters) leads to a change in that behavior (as in, fire insurance can tempt an owner to commit arson if his/her business is doing poorly). But the two clearly have some overlap, and having read the two articles, I don't think they do a good job of making clear the similarities and differences. John Broughton 14:10, 8 July 2006 (UTC)

[edit] Morale hazards

Actually, "moral" hazard arises from intentional destruction to collect from the insruance company or the exaggeration of real claims in order to collect more from the insurance company. "Morale" hazard arises from a persons increased indifference because of the existance of the insurance product. TomPurdue 19:39, 5 September 2006 (UTC)

There really is such a thing as "morale hazard", and it's a separate but related concept. I'm not an expert, but I do know that moral hazard is not necessarily intentional destruction. So I've removed this text and added a link to stub for "morale hazard".

You are right - these are two seperate, yet related, concepts. I've moved the relevant material to the Morale hazard article. Bellemichelle 16:20, 29 September 2006 (UTC)
I don't agree. I think they should be moved back. Moral hazard doesn't imply intention or immorality. "Moral hazard is the risk that the behaviour of an economic player will change as a result of the alleviation of real or perceived potential costs." (Sam Vaknin) RichardVeryard 14:15, 10 October 2006 (UTC)

In insurance, at least, the two need to be distinguished. From "Property and Liability Insurance Principles", by Ludhard & Wiening (published by the AICPCU):

Moral hazards are conditions that may lead a person to intentionally cause or exaggerate a loss. The threat from moral hazard is the possibility that the insured may intentionally cause a loss or file a false claim. For example, an insured may intentionally cause a fire or an auto accident to collect a claim payment on a building or car and unjustly enrich himself or herself. Attitudinal hazards, also known as morale hazards, involve carelessness, or indifference to, potential loss on the part of an insured or applicant. Such hazards are more subtle and thus more difficult to detect than are moral hazards. A particularly dangerous attitudinal hazard is an insured's attitude that "I don't need to be careful because I have insurance."

I think that illustrates my point well and shows they are two seperate concepts. Bellemichelle 15:02, 11 October 2006 (UTC)


[edit] Editing Note

Following discussion with Bellemichelle here and on the discussion page for Morale hazard, we have agreed to consolidate the differing concepts here. In my edit today, I have separated the usage in economic theory from the usage in insurance. I think we have also agreed to merge morale hazard into this article, on the grounds that the concepts make more sense together than separately. --RichardVeryard 10:49, 27 November 2006 (UTC)

[edit] Comment moved from article: 1905 reference

this part from above is incorrect:

"In economic theory, the term moral hazard refers to the possibility that the redistribution of risk (such as insurance which transfers risk from the insured to the insurer) changes people's behaviour. The term was introduced into economic theory by Kenneth Arrow in 1963."

The term Moral Hazard was used in sept 1905 By Everett Crosby in "Annals of the American Academdy of Poltical and Social Science, Vol 26 Insurance pp224-238. The title of the article was FIRE PREVENTION.

I doubt that even this was the first introduction of the term, but the fire prevention use is common in many example of the definition, so it may be the first popularized.

I can be contacted through my blog: http://tswe.blogspot.com/ Update the page as you find appropriate. I couldn't edit the part of the page where the error was.

—Preceding unsigned comment added by 206.210.27.33 (talk • contribs) (Moved by PhilipR 19:46, 19 December 2006 (UTC))



Thanks for moving my comments to the talk area to be discussed.

I think the proper way to think of moral hazard - which I don't think is different from morale hazard -- is a the uncertanty principle http://en.wikipedia.org/wiki/Uncertainty_principle with the uncertanty principle the act of measuring an event changes the event.

With moral hazard to act of insuring an event changes the probability that the event will occur.

The probability of occurance is determined before the existance of the insurance. Once insurance exists the model used to determine the probability of the occurance has changed. In the insurance industry they are only concerned when the change makes the event more likely to occur but there is nothing that says it must change the risk in that manner.

Does anyone know of a term used for an change that makes the event less likely to occur. If not moral hazard could be used for change either way.

Wikipedia is not supposed to be used for developing new ideas, only for recording ideas that are already known. See Wikipedia:No original research.--RichardVeryard 09:10, 20 December 2006 (UTC)


BTW: this is the link to the Everett Crosby article. http://links.jstor.org/sici?sici=0002-7162(190509)26%3C224%3AFP%3E2.0.CO%3B2-G

Thanks. --RichardVeryard 09:10, 20 December 2006 (UTC)

Also is there a way to set a talk to e-mail me once someone else updates it ?

If you register with Wikipedia, you can set up a watchlist including articles and talk pages. You also get your own page, so people can leave messages for you. Not sure if there is an email or RSS option though. And please remember to sign your posts to the talk pages. --RichardVeryard 09:10, 20 December 2006 (UTC)


This link calls Moral Imperitive the oppostie of moral hazard. http://links.jstor.org/sici?sici=0022-4367(198803)55%3A1%3C101%3AMHAMI%3E2.0.CO%3B2-8

There is already an article on Moral imperative.--RichardVeryard 09:10, 20 December 2006 (UTC)


I am confused by the first paragraph, which refers to actions interpreted differently by two parties due to asymmetric information, and the bulk of the remainder of the article, which deals more with risky behavior arising from risk transfer. How does the latter derive from the former? A sentence explaining the connection would be helpful. -cas —Preceding unsigned comment added by 148.87.1.170 (talk) 16:07, 12 September 2007 (UTC)

[edit] Moral hazard has to do with morality??

Sorry, just a layman here. I find the first paragraph of this article misleading. I think in common parlance moral hazard means a tendency to take undue risks because the costs are not borne by the party taking the risk. They believe someone else will bear the costs/pick up the pieces/cover their a$$. I came here looking for verification of common usage and instead got a bunch of gibberish [?] about morality.

Cbmccarthy 21:43, 18 September 2007 (UTC)

Agree, re-written. Comments welcome. I also thought it was gibberish.--Gregalton 10:31, 25 September 2007 (UTC)
The problem is the previous wording was more general and more accurate, and consequently more difficult to read if you didn't already know what it meant. I adjusted your changes but I'm still not sure the lead sentence is very good yet. However a more accessible introduction is always a good goal. Maybe a reworded version of the previous version would be better. - Taxman Talk 13:34, 25 September 2007 (UTC)
Could I suggest that a more simple definition be used in the lead? The more complete definition could be put further down. I'm not suggesting that this is limited to insurance, but it could be phrased as 'insured'.--Gregalton 14:41, 25 September 2007 (UTC)
I don't think we need to be innacurate to be simple. The best intros are accurate and simple. I just can't think of a better way to do it at the moment. The problem with using insured is the concept doesn't have to have anything to do with insurance. It can be just that someone's contract absolves them from the risk thus creating a moral hazard. I'm also remembering that this article isn't being careful at all in considering the difference with morale hazard, perhaps because it doesn't even link to it. I'd have to get some good sources at hand to fix this up right. - Taxman Talk 18:27, 25 September 2007 (UTC)

[edit] Contradict

"On the other hand, some may be more careful about maintaining their health if they do not need to pay for health care, because paying for health care could be too financially burdensome."

Um... what? If someone does need to pay for health care, they will be careful about maintaining their health. This is the opposite. 193.95.165.190 11:42, 8 November 2007 (UTC)

[edit] Final Paragraph?

The final paragraph is still an example of a breakdown of insurance. The person is pursuing healthcare that costs more than his willingness to pay, thus leading to an inefficiency. —Preceding unsigned comment added by 141.152.168.23 (talk) 17:12, 26 November 2007 (UTC)

I agree, I removed that para, it was nonsense.--Gregalton (talk) 17:39, 26 November 2007 (UTC)

[edit] question

"Investors bought securities and hedged against the risk of default and prepayment, pushing those risks further along." Would someone please explain how prepayment is risk? As I see it, if a loan is prepaid, then the money comes back to the lender sooner and can be loaned out again. 75.45.2.84 (talk) 23:54, 27 April 2008 (UTC)JH

Under certain circumstances, getting prepaid is bad. Imagine a bank granted a loan at 10% interest, and borrowed at 8% (for the same term) to make money. If interest rates drop to the point where an otherwise equivalent new loan pays 6%, the prepayment makes the bank lose money - a new loan will make less money, and possibly less than the cost of funding.--Gregalton (talk) 02:26, 28 April 2008 (UTC)