When I wrote a while back about implied value, I was thinking about this story I saw a while back in the New York Times. In it, economist Stan Smith used an implied value calculation to estimate the value of life experience which he calls "hedonic damages":
THERE is economic damage from a wrongful death: the value of a person's lost work life.
Then there is the loss of life's experience - the daily satisfaction of living. Presumably, says the Chicago economist Stan V. Smith, people cherish life itself much more than their work.
"We value our being far more than we value our doing," he said. So why give the loss of work a dollar value but not the loss of daily experience?
Mr. Smith has tried. He coined the term "hedonic damages" for lives and experiences lost.
"As economists, we can't say there's a limit to the value of life," he said. "But there may be an average value that juries can consider."
That average, Mr. Smith figures, is around $4 million.
Mr. Smith says that people unknowingly set a value on their own lives by what they are willing to pay to reduce their everyday risk of death.
Say a certain home safety feature costs $50. If research shows that for every 100,000 of those devices in use, one life is saved, then the implied value of that life is $5 million:
100,000 devices x $50 = $5,000,000 to save 1 life
The more people are willing to pay for safety features, the more they are implicitly valuing their lives. Mr. Smith has calculated value-of-life figures for numerous purchases, based on their costs and how much they reduce the risk of death.
PURCHASED ITEMS AND IMPLIED VALUE OF ONE LIFE:
Smoke detectors: $628,618
Auto safety features: $4,198,517
Top-grade tires: $6,031,019
The examples above show a large variance in how people implicitly value their life. It can only make sense if the value of life is higher than every one of the implied values. If the value is lower in some cases, then people may be making poor decisions.
I'm not convinced, particularly for smoke detectors and airbags where there is a requirement to do install them which tweaks the market.
Posted by: Arthur | September 11, 2009 at 01:11 PM
@Arthur -
Not convinced of what - that these are actually implied valuations, or that the value *should* be implied.
There is plenty of irrationality out there, and plenty of research that highlights why these numbers are likely biased, but I think it is important to recognize these implications when making a decision.
Thanks for the comment,
Pete
Posted by: Pete | September 11, 2009 at 01:22 PM
This sort of thing has been done in the insurance industry for a very long time. Insurance adjusters work from tables that provide loss values for various injuries all the way up to death.
His analysis strikes me as too simplistic. I purchase good tires to maintain control of my vehicle under a wider range of conditions and speeds. This avoids accidents, only in a small percentage of which my life might be at risk. As the other commenter pointed out many of the examples are mandated by government action rather than individual choice. For his analysis to be accurate, I believe he would have to evaluate only those safety items that are chosen freely.
As Schneier often points out, we are more likely to attempt to treat a perceived, but unlikely risk, than a real risk because humans by default perform risk calculations poorly.
Posted by: Richard Brackett | September 22, 2009 at 05:09 PM
Excellent title Implied Value of Life, thanks for sharing this information!
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