When Financial Power Gambles with Your Money
The 2008 financial crisis brought moral hazard - the tendency to take risks when shielded from consequences - into sharp focus, underscoring the critical role of leadership in shaping economic outcomes. The nearly trillion-dollar taxpayer bailout of a reckless financial system, driven by decisions made at the highest levels of power, shook the global economy and exposed the enduring consequences of unchecked risk-taking by those in leadership positions. This event not only cemented a generation's distrust in financial institutions but also highlighted the profound impact that irresponsible leadership can have on global stability, serving as a stark warning in today’s volatile economic and political climate.
Far from being confined to 2008, moral hazard continues to influence high-stakes decision-making. The 2023 collapse of Silicon Valley Bank reignited concerns about its effects on innovation and stability in modern finance, revealing how even institutions central to emerging sectors and investment can fall victim to the same reckless behaviors that plagued traditional finance. Similarly, in 2021, U.K. lawmakers criticized the Bank of England’s post-pandemic financing of high-carbon industries, highlighting the risks of prioritizing short-term recovery over long-term sustainability. These cases underscore how moral hazard has evolved into a multifaceted issue, affecting not only individual institutions but also broader areas like innovation, environmental stability, and public trust.
The critical question remains, why do some leaders so readily shift the risks of their decisions onto others? To explore this, my co-authors and I examined two distinct orientations by which leaders exert influence: dominance and prestige. Dominant leaders exert control through assertiveness and intimidation, often prioritizing personal objectives over collective goals. Prestigious leaders, in contrast, build influence through collaboration and expertise. Although both styles lead to positions of leadership, dominant leaders are more likely to engage in risky behaviors that benefit themselves while exposing others to harm.
To test how leader dominance orientation impacts moral hazard, my co-authors and I conducted 13 comprehensive studies involving over 2,600 observations across financial, environmental, public investment, and public health contexts. In one study, we examined finance professionals, assessing their self-reported dominance orientation. As predicted, individuals with stronger dominance tendencies were more likely to risk clients' capital to maximize their commissions. This finding was replicated with the general population, confirming dominance as a distinct factor driving moral hazard decisions, separate from mere risk preference or greed. In subsequent studies, we found that dominant individuals exhibit a narrow focus on outcomes. This outcome-oriented focus underscored why dominant leaders are more prone to moral hazard behaviors: their emphasis on results over the methods used to achieve them reveals a critical insight into the psychology of decision-making and the risks it poses.
The findings carry important implications for organizations. Dominance is not inherently harmful—bold decision-making can be crucial during crises—but unchecked dominance can create blind spots. Leaders who focus exclusively on outcomes often overlook the broader consequences of their actions, putting others at risk. To counter this, organizations must establish accountability systems that emphasize ethical processes alongside results. One study demonstrated this by shifting participants’ accountability from outcomes to decision-making ethics, significantly reducing moral hazard behaviors among dominant individuals. This suggests that even dominance-driven leaders can act responsibly when held accountable for their methods.
The challenges of our time—public health crises, financial instability, and climate change—frequently hinge on the decisions of a few powerful individuals. Research shows that moral hazard is not just a structural issue but deeply tied to the psychology of leadership. Dominance-driven leaders are particularly prone to risky behaviors that transfer costs to others. Boldness and ambition are vital for navigating today’s complexities, but they must be tempered with responsibility. By tackling the root causes of moral hazard and implementing systems that promote thoughtful, ethical, and equitable decision-making, we can guide leaders to act in ways that advance the well-being of society while supporting the long-term success of their organizations.