Hemant Kakkar and Garrett L Brady write:

In the aftermath of the 2008 financial debacle, a term that was once confined to economic textbooks found its way into the public discourse: ‘moral hazard’. The term describes the inclination toward risky decision-making in circumstances where someone else – not the decision-maker – bears most of the costs. In the case of the financial crash, taxpayers ended up involuntarily bankrolling a bailout of the institutions whose reckless gambles precipitated the catastrophe. It’s been argued that these corporations, deemed ‘too big to fail’, effectively danced on the edge of risk, comforted by the safety net provided by public funds.

Some have suggested that the collapse of Silicon Valley Bank in 2023 set a more recent moral-hazard precedent. After the bank failed, the US government stepped in to protect depositors; this might encourage other bankers to engage in risky lending practices, confident that someone else will handle any fallout. Another example of moral hazard would be when the head of an organisation makes self-interested decisions (which could include increasing the size of their ‘golden parachute’) that put their subordinates and the future of the organisation at risk, but not them, if things go wrong. Moral hazard can also happen at a more individual scale, such as when someone who is infected with a virus decides not to take precautions like staying at home or wearing a mask, thereby putting those in their vicinity at risk without incurring any additional cost themselves.

Given the far-reaching consequences of moral hazard, we need a better understanding of the psychological and structural factors that encourage these kinds of risky decisions. Surprisingly, to date, there has been little such research. An important exception comes from work that delves into decision-makers’ psyches, suggesting that those who wield power, or are imbued with a sense of empowerment, are more likely to make self-serving decisions in situations involving moral hazard. These findings highlight the importance of the leaders’ role in understanding this problem.

However, we know that not all leaders act out of self-interest, especially when their actions can harm others. Many leaders view power not just as a means to personal gain, but also as a responsibility to serve others. Furthermore, even individuals without a leadership position can make decisions that put others at risk. So, the question becomes: why do some, but not all, decision-makers make these risky decisions? [Continue reading…]