Dot Wordsworth

Moral hazard

Moral hazard
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‘Heads. Heads. Heads. Heads,’ said my husband, tossing an imaginary coin. The same improbability was amusing when Rosencrantz won the toss 92 times in a row in Tom Stoppard’s play (1966). We know the odds for the next toss are 50-50, but we can’t help thinking it morally impossible for the lucky streak to go on.

This term morally impossible is not the same as something being immoral. The thickets here are tangled. As the Oxford English Dictionary points out with rare loquacity, Aristotle declared that moral philosophy cannot expect proofs that are mathematically certain. Aquinas quotes him when concluding that ‘in contingent matters, such as natural and human things, it is enough for a thing to be certain, as being true in the greater number of instances’. (In the Summa it’s Prima Secundae, q 96, article 1, reply to objection 3.) But only in later centuries was moral certainty  methodically distinguished from metaphysical or physical certainty.

Last month someone wrote in the Times about the former Bank of England governor Mervyn King, in 2007 being ‘obsessed about moral hazard: the notion that bailing out one bank would encourage others to behave irresponsibly’. This sense of moral hazard had been applied since the 19th century to fire insurance (encouraging carelessness with candles) and health insurance (encouraging malingerers).

In the 1960s the economist Kenneth Arrow wrote about moral hazard. He found its origins in the writings of Daniel Bernoulli, who in 1738 outlined the St Petersburg paradox. This supposes that a bank offers you a game in which, each time a tossed coin comes up heads, the pot is doubled. When tails comes up, you win the pot. How much would you pay to enter the game? Since the possible winnings are infinite, you should offer an unlimited fee. But no one would. There’s a gap between theoretical chances and moral certainty. Bernoulli referred to espèrance morale, moral expectation in this jeu de hazard.

As Allard Dembe and Leslie Boden observed in a paper in 2000, this has nothing to do with morality. That, however, did not mean that there was no sin in bankers earlier this century reselling risky loans that would never be repaid.