Tim Harford on Moral Hazard

Slate.com had a piece by Tim Harford on how we should all just lighten up, relax and learn to enjoy the bailout… heck, that’s what insurance is for; but also points out the abuses of insurance with this tasty example:

… we might usefully remember what the antiquated jargon “moral hazard” means. The term originated in insurance, recognizing the idea that people with insurance may be careless—for example, paying for secure off-street parking looks less attractive if your car is insured.

Moral hazard can sometimes take extreme forms. According to the St. Petersburg Times, in the late 1950s and early 1960s, more than two-thirds of insurance claims for the loss of a limb originated in the Florida Panhandle. At the epicenter, “Nub City”—the tiny town of Vernon, Fla.—almost 10 percent of the adult population had lost a limb. One man was said to be insured by dozens of companies when he lost his foot: Fortunately he had been carrying a tourniquet at the time of the accident. He pocketed $1 million. Another man shot his foot off—”while aiming at a squirrel”—just 12 hours after buying insurance. Now that’s careless—and that’s moral hazard in spades.

Nub City is the best town nickname I’ve heard in awhile; I’ll offer up “Broke Street” as a new nickname for lower Manhattan.