Question

Explain the concept of moral hazard as it relates to organizational decision making and how it can play a role in adversely influencing that decision making

Answer 1

Concept:

Due to the lack of information of each other, if one party involves in risky affairs as the risk is protected by such other party on the happening of actual danger is known as moral hazard.

Suppose an example of smoking habit could be taken – the person knows that he is in risk, because smoking kills; he takes a life insurance of very high amount for protecting his family and continues smoking severely; the insurance company doesn’t know the fact. This is the clear case of moral hazard – the person knows that if he is died, his family will be adequately funded by the insurance company; knowing that fact he gets relief and continues to live life risky.

The organization should check and try to get maximum information about the party. In this scenario, the insurance company should go for health check up before offering any life insurance scheme. If it is found that the party is a smoker, the company should offer very high insurance premium to guard against the risk.

Influence:

The above decision restricts moral hazards. The organization gets to know the consequence in advance; therefore, once the actual incident occurs they won’t be a looser. Here, the insurance company does that thing; such high premium amount discourages of taking insurance – the party may think of quitting from smoking and pay normal premium for normal life insurance policy.