Definition of Moral Hazard – A Bottomless Bag of Cookies.

Imagine a five-year-old comes to you and asks if they can have a cookie.

“Yes.” you say, “there’s a bag full on the counter in the kitchen. You may go and get one.”

Can you guess what will happen?

Now can you guess who’s fault it is when they take three cookies?

If you said either the child or the parent, you are wrong. There’s always a shared responsibility in any human interaction. While disciplining the child for his decision to disobey, a parent must also discipline themselves to not provide their children with such opportunities in the first place.

This is how I understand Moral Hazard.

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