Involves

Word

Moral Hazard

MOR-ul HAZ-urd · noun

The risk that protection from a loss encourages behavior that makes the loss more likely or more costly

Examples

  • The guarantee created moral hazard if lenders could keep gains while shifting losses elsewhere.

  • A deductible can reduce moral hazard by leaving the insured person responsible for part of a loss.

Origin

The term belongs to the vocabulary of insurance and economics. Moral does not require a verdict that someone is wicked. The relevant question is whether protection changes behavior by changing who bears the consequences. This differs from adverse selection, which concerns who enters an arrangement.

How it connects

The term names the behavioral risk created by shifting the cost of failure.

This word appeared in What protection changes, the Involves connection for September 14, 2026, which asked: Can making people safer encourage someone else to take more risk?

Check yourself

Which situation best illustrates moral hazard?

A guarantee encourages a firm to take risks whose losses another party will cover. Exactly. Moral hazard concerns behavior altered by protection. Sorting into coverage is the separate problem of adverse selection.

What the sources establish

  • Moral hazard concerns risk-taking incentives under protection, distinct from adverse selection.

Sources