Why a great insurance policy can make you a worse driver

Economists call it moral hazard: when someone is shielded from the consequences of a risk, they tend to take more of it. It's not that people are dishonest — it's that incentives quietly shift once the downside belongs to somebody else. A driver with bumper-to-bumper insurance may park a little more carelessly. A bank that expects a government bailout may make riskier bets. The protection itself changes behavior.

The key ingredient is hidden action — the party bearing the cost can't fully see or control what the protected party does after the deal is struck. Your insurer can't ride along to check how hard you brake. This is what separates moral hazard from simple bad luck: the risk rises because of the coverage, not by chance.

Smart contracts fight back by keeping some skin in the game. Deductibles, co-pays, and higher premiums after claims all force you to keep absorbing part of the loss, which realigns your incentives with the insurer's. The lesson reaches far beyond insurance — any time you fully protect someone from a downside, you may unintentionally encourage the very behavior you were guarding against.