Other people’s risks

As described in a recent issue of The Economist:  “Moral hazard is a problem that crops up often in economics. People behave differently if they do not face the full costs or risks of their actions: deposit insurance makes customers less careful about picking their bank, for example. Moral hazard can also be second-hand. Take medicine. A patient with private insurance may be happy to sit through extra tests, and a doctor may be happy to order them. Doctors might be more reluctant to order tests if they know that the patient would bear the full cost. A newly published paper sets out to test this secondary problem by examining a common-enough situation—taking a taxi ride in a strange city. The authors, a trio of academics at the University of Innsbruck, sent researchers on 400 taxi rides, covering 11 different routes, in Athens, Greece. In all cases, the researchers indicated they were not familiar with the city. But in half the cases, the researchers indicated that their employers would be reimbursing them for the journey. The researchers in the latter group were 17% more likely to be overcharged for their trip and paid a fare that was, on average, 7% higher.”

The verdict: a clear case of “second-degree moral hazard.”

Moral hazard has been a subject of various other posts here.  It is like conflicts of interest and behavioral ethics – the two principal topics in this blog – in that all reflect some type of impairment in ethical decision making. But, each obviously is different from the other; indeed, there is arguably a tension between behavioral ethics and moral hazard, in that the former can be seen as a partial repudiation of the notion of homo economicus (humans as highly rational economic actors) whereas the latter suggests we have not gone far enough to understand how that semi-mythical creature really operates, as further discussed here.

All three frameworks are important in understanding risks.  But, at least in compliance and ethics circles, moral hazard has gotten less attention than have its two related types of impairment, which was why I was happy to see this article.

The taxi overcharging study indeed  seems to be an important contribution to the moral hazard field (although I hasten to add  that I’m relying here entirely on The Economist summary of it). Just as Samuel Johnson once said that a certain individual was not only dull but the cause of dullness in others, so this study has shown that moral hazard can be the cause of unethical action by others beyond the obvious subjects. That is useful knowledge because it helps demonstrate – at least in a general way – the power of moral hazard.

Does this have any practical implications for compliance & ethics programs? Maybe it does in the area of risk assessment, but for the most part, probably not.

Thinking more broadly, however, moral hazard imperils our ability to deal with climate change, debt and various other threats where future generations will bear the consequences of present-day decision making. And, understanding moral hazard – as well as COI and behavioral ethics – can help E&C professionals and others contribute to the crucial dialogue  on those challenges.