Moral hazard facts for kids

Moral hazard is an idea in economics. It describes a situation where someone takes a risk, but someone else has to deal with the bad results if things go wrong.

Think of it like this: If you have insurance for your car, you might be less careful about locking it. Why? Because if it gets stolen, the insurance company will help pay for it. This means you might take more risks because you know someone else (the insurance company) will share the cost if something bad happens. This is a type of moral hazard.

Moral hazard can also be called a reverse incentive. This means it's a situation that accidentally encourages someone to act in a way that might lead to more risk.

What is Moral Hazard?

Moral hazard happens when one person or group doesn't have to face all the costs of their risky actions. Because of this, they might act differently than if they had to pay all the costs themselves.

How Insurance Shows Moral Hazard

Insurance is a common example of moral hazard. When people are insured against a loss, they might change their behavior.

• Before insurance: You are very careful with your car, always locking it.
• After insurance: You might become less careful because you know the insurance will cover some of the cost if your car is stolen.

This doesn't mean people are trying to be bad. It just means that the way things are set up can change how people act.

History of the Term

The words "moral hazard" have been used for a long time. They first appeared in the 1600s.

Back then, the word "moral" in "moral hazard" meant something like "personal" or "subjective." It didn't mean right or wrong, like in ethics.

Later, in the 1960s, economists started using the term more often. They used it to talk about problems that happen when one person knows more than another in a deal. This is called information asymmetry. When there's moral hazard, it's seen as a type of market failure. This means the market isn't working as well as it could.

Related Ideas

• Conflict of interest: When someone's personal interests might affect their decisions.
• Game theory: A way to study how people make decisions when their choices affect others.
• Unintended consequences: Results that were not planned or expected.

Images for kids

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  This picture shows how moral hazard can change choices in economics.

See also

In Spanish: Riesgo moral para niños