Moral hazard occurs when a party insulated from risk may behave differently than it would behave if it were fully exposed to the risk.
Moral Hazard: Information Assymmetry
Moral Hazard: Principle-Agent dilemma
The Error of Conformation
(Nelson Goodman´s) Riddle of induction
The riddle of induction is a version of the narrative fallacy-you face an infinity of “stories” that explain what you have seen. The severity of Goodman´s riddle of induction is as follows: if there is no longer even a single unique way to “generalize” from what you see, to make an inference about the unknown, then how should you operate? The answer, clearly, will be that you should employ “common sense,” but your common sense may not be so well developed with respect to some extremistan variables.
– Nassim Taleb, Black Swan
It has been observed that racetrack bettors tend to shift their bets to riskier prospects as “these bettors really prefer ongshots because a small longshot bet can gererate a large enough profit to cover their earlier losses, enabling them to break even”. What the “the-end-of-the-day-effect” (tells us is that people use reference points in decisions that they make under uncertainty which goes against the expected utility theory (that assumes that people make rational choices).
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