Moral Hazard – It’s Everywhere

Maybe We’re Not All Completely Greedy and Evil.

Recently, at a local coffee shop, my wife – who had been keeping count – told me that I‘d consumed six cups of coffee over two hours for one low price of $2.89. She observed that I would never have done that if the shop charged for refills. My inner economist called out: “moral hazard!”

You might not have heard of moral hazard, but it strongly influences our thinking. It’s the assumption that we act irresponsibly when there are no negative consequences – in other words, if we know somebody else will absorb the cost, we act recklessly, and even antisocially. It’s a pervasive mindset in our culture, and is at the heart of a lot of our disagreements.

• When elected officials demand that public assistance programs be time-limited and linked to work, a moral hazard mindset is probably driving that rhetoric. They are assuming that, without restrictions, participants in these programs will exploit them indefinitely.

• When parents or child-rearing experts espouse the necessity of setting ‘firm boundaries,’ or clear consequences for children, moral hazard thinking is probably lurking beneath the surface. The idea is that, without boundaries and consequences, kids will just take advantage of their parents.

This idea frequently emerges in the qualitative research I conduct. I once moderated several studies on health insurance, conducting over 150 interviews and groups with healthcare providers, administrators and consumers. I found a widespread perception that, if healthcare services and products are too easily accessible, people will use them wastefully.

I also encounter this idea frequently in social situations. Listen to conversations these days about things like bank bailouts and the social safety net. The opinions people express are strongly informed by a moral hazard mindset.

Where does this idea come from? And, more importantly, is it true?

Let’s start with its origin. The concept of moral hazard comes to us from the field of economics, dating back to the 17^th century. Since then, it has been widely studied as a source of economic inefficiency.

And, is it true? The accurate answer is ‘it’s complicated.’ It’s clear that, in the context of health insurance, the influence of moral hazard is – according to healthcare economist Uwe Reinhardt – ‘overblown.’ He points out that people dislike going to doctors and taking medication, making it unlikely that being insured will lead them to consume healthcare excessively. There is also quite a bit of data that backs him up.

And yet, there’s no denying that moral hazard is a real thing.

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Why do I bring all this up? Because moral hazard is a highly influential idea. I encounter it – usually unspoken – all the time when conducting market research, it frequently arises in conversation with friends and family, and it plays an enormous role in formulating government policies.

It’s undeniable that moral hazard exists. Remember the six cups of coffee? Clearly, coffee isn’t healthcare. Jeff, the café owner, told me that he was fine with this – the economics of a cup of coffee are so favorable that he still makes good money on freeloaders like me. If he didn’t, he would limit refills. He also finds that his loyal customers like the policy, and believes that it creates an atmosphere of trust and shared purpose among his customers and employees.

It’s important to understand that moral hazard is a mindset – a set of assumptions that shape our interpretation of the world around us. Specifically, it’s a moral mindset – it assumes that people are inherently wicked and greedy, and that they will engage in antisocial behavior if they are insulated from the consequences of that behavior.

Those for whom this mindset plays an important role assume that people will invariably act immorally given the opportunity, and that we gain little from having faith in others. Others tend to be more trusting of their fellow humans. Furthermore, as evolutionary biologists have observed, selflessness and altruism clearly exist across many species.  So, if you find yourself disagreeing with a friend, family member or politician, consider the possibility that different assumptions about moral hazard are the source of that disagreement, and take this as an opportunity to engage in some thoughtful conversation.