Which of the following actions best illustrates moral hazard?
A)A person adds risky stock to his portfolio.
B)A person who has narrowly avoided many accidents applies for automobile insurance.
C)A person is unwilling to buy a stock when she believes its price has an equal chance of rising or falling $10.
D)A person purchases homeowners insurance and then checks his smoke detector batteries less frequently.

Question

Quizplus · Accepted Answer

Moral hazard refers to the increased risk-taking behavior of an individual or entity after being protected from the consequences of that risk. In this case, purchasing homeowners insurance provides protection from the loss due to a fire, which may lead the person to check their smoke detector batteries less frequently as they feel protected from the consequences. This behavior increases the risk of a fire and is an example of moral hazard. The other choices do not necessarily involve protection from consequences, and therefore do not illustrate moral hazard.

Which of the Following Actions Best Illustrates Moral Hazard