Moral hazard occurs when a person or entity unfairly "games" a risk situation.

Conditions for moral hazard:

(1) a person or entity enters into a situation or agreement with a certain level of risk

(2) the person or entity have a situation where someone else (for example, an insurance company) pays if there are losses

(3) the person or entity take unreasonable risks since they have no downside


In this situation the person or entity is dishonest, leaving someone else responsible for mistakes, resulting in reckless behavior. The term "moral hazard" is from the 17th century when it was seen as a problem in morality.

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