Moral Hazard

Moral hazard refers to the possibility that a person or company shielded from risk may behave differently from how they would if they were fully exposed to it. It is derived from the insurance industry where it refers to the possibility that the possession of insurance may affect people's behaviour. Holders of fire insurance, for example, might be less careful to avoid the risk of fire than if they were not insured. In the financial services sector, moral hazard refers to the possibility that companies and individuals shielded from losses resulting from poor decision-making may continue to make poor decisions. During the global credit crisis of 2007/08 it was used as an argument to oppose 'bail-outs' of loss-making institutions by governments or other public bodies.