Moral Hazard and the Survival Value of Risk
By: Dr. Sam Vaknin
Also published by United Press International (UPI)
Also Read:
The Business of Risk
Risk transfer is the gist of modern economies. Citizens pay taxes to
ever expanding governments in return for a variety of "safety nets" and
state-sponsored insurance schemes. Taxes can, therefore, be safely
described as insurance premiums paid by the citizenry. Firms extract
from consumers a markup above their costs to compensate them for their
business risks.
Profits can be easily cast as the premiums a firm charges for the risks
it assumes on behalf of its customers - i.e., risk transfer charges.
Depositors charge banks and lenders charge borrowers interest, partly
to compensate for the hazards of lending - such as the default risk.
Shareholders expect above "normal" - that is, risk-free - returns on
their investments in stocks. These are supposed to offset trading
liquidity, issuer insolvency, and market volatility risks.
The reallocation and transfer of risk are booming industries.
Governments, capital markets, banks, and insurance companies have all
entered the fray with ever-evolving financial instruments.
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