Is There a Better Term for Moral Hazard?

BY busadmin  February 12, 2010 at 10:40 AM EDT

Question: Paul, Thank you for your excellent explanation of moral hazard. I checked many other sources before I found your website and only found confusing definitions. The main problem is that the phrase “moral hazard” does not seem well related to the phenomenon it describes.

Any chance the finance industry come up with a better term? What would it be? “Risk inducement”? I’m not sure, but “moral hazard” seems unnecessarily confusing.

Paul Solman: So it does. For those who haven’t read the webpage referred to, see below, “moral hazard” is generally used to mean the hazard that someone will take greater risk because s/he’s protected against it: driving too fast because s/he’s wearing a seatbelt, say; skydiving because of a lavish life insurance policy.

There is an interesting literature as to why such hazards got the adjective “moral” — back in the 1600s, it seems, with regard to insurance on shipping in England. Was the hazard that the insured would behave “immorally” because, once insured, they could take unreasonable risk, or even indulge in unscrupulous behavior? (Scuttle the ship, say, after clandestinely off-loading its cargo.)

It turns out, however, that back in those days, “moral” could also mean “perceptual or psychological,” according to Merriam Webster, “rather than tangible or practical in nature or effect,” as in “a moral victory” or “moral support.”

You want a new term? How about “insurance hazard”? But then, investment advisor/country singer Merle Hazard would have to change his name to something like “Rance Hazard,” and that really doesn’t work.

PS: The website Mr. Robinson mentions, wholly devoted to the issue of “Moral Hazard,” can be found here.