Moral Hazard

Advanced 💰 Finance / Accounting

Definition

When someone takes excessive risks because they're protected from consequences (someone else bears the loss). The reason banks took insane leverage in 2008.

Example Usage

Deposit insurance creates moral hazard because banks can take riskier investments knowing their depositors are protected.

Origin

From insurance terminology, describing the risk of fraud or carelessness.

Fun Fact

Too-big-to-fail is moral hazard on steroids—banks get bailed out while ordinary companies go bankrupt for the same behavior.

Source: Economics and financial theory

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