Moral Hazard
Moral hazard is hidden action after a contract is signed: insurance, a guarantee, or a backstop changes the agent’s incentives and often raises the risk the principal wanted to cover.
Definition
Moral Hazard refers to moral hazard is hidden action after a contract is signed: insurance, a guarantee, or a backstop changes the agent’s incentives and often raises the risk the principal wanted to cover. Keep that definition fixed when comparing series, managers, or regimes — renaming the same tape does not create a new signal.
Why it matters
It is a named object desks use to frame risk, positioning, or process. When moral hazard is hidden action after a contract is signed: insurance, a guarantee, or a backstop changes the agent’s incentives and often raises the risk the principal wanted to cover shifts, related hedges, limits, and narratives usually need an explicit update rather than a quiet assumption.
Case
Suppose a desk is positioned for the opposite of what moral hazard is saying. If moral hazard is hidden action after a contract is signed: insurance, a guarantee, or a backstop changes the agent’s incentives and often raises the risk the principal wanted to cover moves against that book, the first question is not “is the story clever?” but whether size, hedges, and stop logic still match the observation.
How to read it
Keep the definition fixed, then challenge it with cross-checks before sizing. Prefer a short written null hypothesis for Moral Hazard: what would falsify the current reading in the next window?