Wont hurt if you know - III

Two terms that are being increasingly used in today's terminology.

Moral hazard: This economic concept, though old, has currently gained currency in light of the recent sub prime crisis in US, which threatens to rattle the boats of many countries which were sailing in tandem with the US frigate. It has its roots in the insurance business. The idea goes like this: If you protect someone too well against an unwanted outcome, that person may behave recklessly. Someone who buys extensive liability insurance for his car may drive too fast because he feels financially protected.(From Wall Street Journal)

It is pertinent in the extant global financial scenario because many of the banks, in absence of resuscitation from their respective central banks, will go under. Now, these banks while making investments in products built around sub prime loans and mortgages should have been (caveat emptor) and infact were aware of the concomitant risks. Bailing them out with someone else's capital leads to a false sense of security and sets an unhealthy precedent.

Long tail effect: The phrase The Long Tail (as a proper noun with capitalized letters) was first coined by Chris Anderson in an October 2004 Wired magazine article to describe certain business and economic models such as Amazon.com or Netflix.
Businesses with distribution power can sell a greater volume of
otherwise hard to find items at small volumes than of popular items at
large volumes. The term long tail is also generally used in statistics, often applied in relation to wealth distributions or vocabulary use. Read more @ Wired.com (Excerpt from wikipedia)

Powered by ScribeFire.

No comments:

Post a Comment