Why We Must Expand the Moral Hazard Concept to our Projects and Initiatives

5 Minutes Podcast with Ricardo Vargas

In this week's episode, Ricardo talks about moral hazards. He exemplifies the recent collapse of the North American financial system when the Silicon Valley Bank closed its doors. From then on, a debate arose about the extent to which the government should interfere, with the emergence of moral hazard, because if the government helps, other banks will also have this right. Bank executives will assume riskier operations, and investors will be less demanding of the banks with which they do business.

From the perspective of projects, we can experience the same situation; that is, we risk more when we think there will be fewer consequences if the risk materializes. If nothing occurs when a supplier is late, he will not be incentivized to provide on time. The issue is that we do not know exactly what transpired with the delivery, and if we punish this supplier, we face the danger of other vendors refusing to do business with our company. This is the principle of asymmetric information; we know less about the impact and probability of the risk occurring than the supplier does. And there is no mathematical solution to this impasse; it all depends on human expertise to comprehend the issue and choose the least risky option.

Listen to the podcast to know more.