“You learn something new every day of your life,” my dad used to say to me.
He was right, of course. A week ago I learned a concept that is, apparently, familiar to economists and philosophers but was for some reason unknown to me: moral hazard. Let’s first look at a couple of examples of this oddly named phenomenon, and then we’ll try to understand a couple of definitions:
- Example 1: You want to protect yourself by taking out ski insurance. This makes you feel safer, so your risk-taking goes up. As a result of the risky behavior, you’re less safe than you were before having insurance.
- Example 2: Seat belts become mandatory. Drivers feel safe, therefore drive more recklessly, and the accident rates from crashes increase.
Definitions from the first two google hits:
- “lack of incentive to guard against risk where one is protected from its consequences.”
- “moral hazard occurs when someone increases their exposure to risk when insured, especially when a person takes more risks because someone else bears the cost of those risks.”
The second definition is apparently a paraphrase of what Paul Krugman says, and we know we can trust Paul Krugman: “any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly.”
OK, I think we get the picture, but you probably have a couple of questions: Why is it called by the opaque term “moral hazard,” and what was the context in which I learned this term? For the first question, we learn that “prominent mathematicians studying decision making in the 18th century used “moral” to mean “subjective”, which may cloud the true ethical significance in the term.” I hope that makes more sense to you than it does to me. Unfortunately I have never studied economics. (In college I used to say “I want to have taken economics, but I don’t want to be taking it.”)
The context in which I learned the term was a podcast discussing Naloxone, a.k.a. Narcan, the well-known overdose reversal drug. The claim was that statistical analysis shows an unforeseen consequence of the widespread availability of Naloxone: those addicted to opioids are more likely to overdose, as they can do so with impunity. That certainly presents moral dilemmas, using the modern sense of the word. I have not examined the statistical studies, so I’m not commenting on their validity.