00:01
All right, so for each of these, we're going to talk about moral hazard and something that reflects adverse selection.
00:05
So first, let's define those.
00:07
Moral hazard is the idea that, basically, there's no incentive to guard against risk, no incentive to mitigate risk, because you think you'll be protected from consequences.
00:28
And then adverse selection is when one person has more information about a situation.
00:47
So one person, either the buyer or the seller, has more info about something.
00:57
All right.
00:58
So if we think about health insurance, one moral hazard would be to, take no care of your life.
01:10
So maybe you start to smoke because you know that if you develop any kind of thing, that the insurance will pay for that and kind of cover you.
01:24
I don't know.
01:25
Maybe you decide to have a little too much fun at the trampoline park, like break your foot because you know that your insurance will cover that.
01:35
On the other hand, adverse selection.
01:39
Is going to be maybe you know that you have a strong family history, history of diabetes, for example.
01:52
And say the insurance company doesn't know that, and if they did know that, you'd probably have to pay a higher premium, but you don't tell them that.
02:00
So then that's adverse selection...