With fatherhood impending, my thoughts have recently been filled with how best to raise my child. A significant part of parenting is discipline; determining what constitutes “bad behavior” or “good behavior” and how to respond appropriately. We know the classic techniques; positive reinforcement rewards good behavior, negative reinforcement does not reward bad behavior, punishment provides consequences for bad behavior, etc. As the responsible party, it can be difficult to be sure that the consequences being levelled are affecting the desired outcomes. This brings up the problem of Moral Hazards, an often encountered situation that, it seems, the general population is ignorant of as a definitional occurrence.
An example to illustrate: We all want our roads to be safe, and so car companies (and government regulatory bodies such as the NTSB) have gone to great lengths to make cars safer by reinforcing the frames, providing high-tech braking mechanisms, installing airbags, passenger airbags, side-curtain airbags, ad nauseum. However, it stands to reason that drivers’ actions (DUI, DWI, reckless driving, texting-while-driving, etc.) are a larger determinant for roadway safety than the safety of the car. So does making a safer car encourage good driving? Hardly. Emboldened with the knowledge that you can drive your car off a cliff and survive with naught a scratch actually encourages the opposite. If what we really want are attentive, courteous, well-behaved drivers, it would be better to install an iron spike in the middle of every steering wheel in America.
While this is certainly an outlandish and severe example that would never happen in real life, it serves the purpose of any philosophic example, which is to have you remember it! The larger question that needs to be addressed is this; we need to do the best we can to make sure that the consequences imposed on our charges affect the appropriate outcomes. If Congress wants the financial sector to stop putting everyone’s 401(k) at risk, they should not bail out the firms that did so. If a company underperforms during a given period, upper management should not receive bonuses. If some college kid maxes out a dozen credit cards, their parents should not pay them off. The real-world examples of applied moral hazards are ubiquitous, so it is easy for me to find examples of bad behavior being rewarded.
The hard part will be avoiding doing so myself.