Moral hazard refers to a situation where one party takes risks because they do not have to bear the full consequences of their actions. This often occurs in financial contexts, such as when an individual or organization is insulated from risk, leading them to act less cautiously. For example, if a bank knows it will be bailed out by the government, it may engage in riskier investments. This concept is important in insurance and finance, where it can lead to negative outcomes. When people feel protected, like with health insurance or bank bailouts, they may take actions that increase the likelihood of loss or damage, ultimately affecting the system's stability.