This is a term that's tossed around by people who mostly can't really define it in simple terms.
It occurs in the arenas of business and economics for the most part.
I never used it up to now because I wasn't really sure I understood what it means.
I tried really hard to get a handle on it, even reading a novel (excellent, by the way) entitled "Moral Hazard" by Kate Jennings, a former banker who knows whereof she writes, but it too left me befuddled as to the meaning of term.
I'm pleased to report that after decades of ignorance I now can define it: A moral hazard is a situation or circumstance in which someone benefits from someone else's misfortune and in which there is a financial incentive to choose one outcome over another.
A concrete example: a person comes into the ER with a sudden headache, very painful and disorienting.
After the initial workup, a neurosurgeon is consulted and recommends a cerebral angiogram as there's a suspicion of an aneurysm.
This is confirmed by the angiogram, which also shows the aneurysm hasn't ruptured.
Here's where the moral hazard appears: there are two options, either take the patient to the OR to clip the aneurysm and prevent potential rupture, or observation.
It turns out that the long term outcome of such a condition statistically is the same regardless of which option is chosen.
Complications of aneurysm surgery include bleeding causing permanent brain damage and death.
Observation carries with it the same hazards.
The neurosurgeon will bill $40,000 or more for the surgery, while no such return exists for the consult described above.
What would you do if you were the neurosurgeon?
"What would you do if you were the neurosurgeon?"
ReplyDeleteBRIGHTON : We can't just do nothing, sir!
ALLENBY : Why not? It's usually best.
Certainly an interesting question if it really is as simple a moral hazard as this, but I wonder if this is an example of the misuse of broad actuarial data.
ReplyDeleteI'm reminded of Steven Jay Gould's take on his cancer diagnosis, in which he parsed the terribly pessimistic statistic on his chances. While it's true that over all, one's chances might be pretty poor, the statistic includes all sorts of circumstances and secondary conditions that may or may not apply. Of course he did die in the end, but not as the direful statistics predicted. If you don't drink and don't speed and keep your brakes working, etc., your likelihood of dying in a car crash, while not zero, is far less than the actuarial statistic. I've seen similar takes to the above on mammograms and prostate exams and the like, and they're often based on the overall percentage of misdiagnoses and treatment errors.
The above situation may well be a moral hazard as inevitable as it seems in the abstract, but if I faced such a situation I might shop around for an honest neurosurgeon with a success rate above the average, and revisit the statistic.