Moral Hazard

I came across this term in a book I recently read. It’s a useful concept, though not entirely intuitive to decipher. What it means is this: Decisions made by people who know the price of bad decisions will be paid by someone other than them. The effective result is to divorce bad choices from consequences.

We see it around us every day; the financial crisis of  ’08 was replete with particularly pungent examples: Wall Street investment bankers, financial market regulators, bond rating agencies and institutional investors being but the most visible miscreants.

Anyone who follows business news is now probably de-sensitized to the notion of CEO’s running companies into the ground, then being put out to pasture with “packages” containing more zeros than a box of Cheerios. General managers of sports franchises seem to have a pretty easy ride, if team performance is any measure of managerial effectiveness, particularly in the Toronto market.

In politics, there arguably used to be a rough accountability, based largely on how the economy was faring – provided a politician or party didn’t let it slide off the tracks, whether or not they’d made anything amounting to “wise” choices, they could count on the benefit of the doubt at the voting booth.

If Ontario’s premier wins the next election, that will signal another non-operational metric – saddling us with an additional $100 billion debt, official status as a “have not” province and significantly declining industrial performance should be a trifecta for an eviction notice from Queen’s Park. Or, not.

So, perhaps today the notion of being held to account for errors in judgment, even of a horrific nature, is just a quaint historic notion. But,  no matter what grand idea is being proposed, whatever the colour of your political stripe, don’t forget bad outcomes will come to roost not at the doorstep of the instigators, but yours.

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