ARBUS202 Lecture Notes - Lecture 10: Moral Hazard, Numeracy
20 Mar 2016
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We are the only animal with finance, contracts, a structured market. Moral hazard: we shield people from their consequences so they do the same thing again. Risk: ,000,000 if i win versus ,000 if i take the insurer"s offer. You would pool risk and get insurance because you want to cover yourself if you have bad years. It costs a lot to self-insure so you should pool risk. But this makes you think you"re invincible. (ex. I"m not going to work as hard because i know that if i have a bad year, then i will get money to cover loss profit) Cost of group work: moral hazard, free rider, ends-justify-means thinking. Everyone does what is in their best self-interest and everyone ends up worse off (social problem: prudential: neither of you should pay, ethical: both of you should pay. Harvard study: students admire good work and good workers but students want to be successful.
