Moral hazard occurs when one party takes risks because they do not have to bear the full consequences of their actions. This often happens in situations where there is an imbalance of information or responsibility, such as in insurance. For example, if a person has comprehensive car insurance, they might drive less carefully, knowing that any damage will be covered. This concept is important in finance and economics, as it can lead to reckless behavior. In the case of banks, if they believe they will be bailed out by the government during a crisis, they may engage in riskier investments, creating instability in the financial system.