George Eliot wrote the book on moral hazard


Do not waste any time on sermons and the prohibition. Even if the Good Lord himself were to deliver the Sermon on the Mount, He would be ignored. Hardened gamblers only give up when they have made the resolution to quit themselves.

Middlemarch, England

Dear Agony Uncle (or Aunt, as the case may be)

My engaging but feckless nephew, Fred Vincy, has lost large sums in injudicious trading. I have paid off his debts, but would like to teach him to behave responsibly while minimising my future expenses.

My friends have recommended that I ask Lord Turner to keep an eye on him. Lord Turner will have full power to supervise his activities, although Fred will of course be free to complain to me if he feels the supervision is heavy-handed. My advisers suggest I should tell Fred that future gambling losses must be met out of his own allowance, but that I will always make sure he does not go bankrupt. I am sceptical about this plan.

I have considered several options: to require him to attend church and encourage the Reverend Mervyn King and the Venerable Alan Greenspan, to deliver sermons on the evils of speculation; to prohibit him from gambling altogether; to cut him off without a penny; to tell his gambling friends that they cannot look to me for settlement of any future debts but to reassure the grocer and the tailor that Fred’s reasonable bills to them will be paid.

What should I do?

Nicholas Bulstrode

Dear Nicholas

Your dilemma has troubled guardians throughout the centuries, and there is no easy answer. The problem is known as moral hazard. If your nephew is to become a useful and responsible citizen, he must be free to make mistakes, and learn from them. Yet these mistakes can have very damaging consequences both for him and the wider community. Sadly there is no simple way of reconciling these objectives.

I am sure your instincts are right and your friends are mistaken. The Lord Turner is an excellent fellow, but he cannot watch Fred all the time and his servants have not always been reliable. Nor am I sure this plan would give him sufficient authority – young Fred can be very persuasive and insistent. Worse, an inevitable consequence of such a strategy is that when Fred is on a losing streak, he will double up his bets – after all, heads he wins, tails you lose. You will find this course both time-consuming and expensive.

I think your list exhausts the alternatives open to you. Do not waste any time on the first two options – the sermons and the prohibition. Both have been tried in the past, and they do not work. The Venerable Alan’s words carry great weight, especially since there are rather a lot of them, and after his recent conversion he is very sound on speculation. So is the Reverend King, and he is crisper – but his erudition is sometimes difficult for today’s youth. But even if the Good Lord himself were to deliver the Sermon on the Mount, He would be ignored. And the same will be true of prohibition. Hardened gamblers only give up when they have made the resolution to quit themselves.

While it is tempting to cut off Fred’s allowances, you may be sure that Fred would not take the loss of his expectations quietly. And though you may feel he deserves his fate, you will be imposing losses not just on him but on the butcher, the baker and the candlestick maker. You may damage your good reputation in Middlemarch.

That leaves the final possibility – to say firmly that you will protect innocent tradespeople but that Fred’s gambling friends must look after themselves. The best, perhaps the only, people able to police behaviour at the gaming tables are other people at the gaming tables. They can be a bit rough, but that may be what is needed to teach young Fred his lesson. I recommend you deal directly with the tailor and grocer, give them the reassurance they seek, and tell Fred you will not give him funds in future beyond his normal allowance. He may yet find a good woman and settle to an honest trade.

Yours, in hope of a happy ending,

George Eliot

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