Excerpt from Chapter 9: Hedonic Damages
Economic/Hedonic Damages: The Practice Book for Plaintiff and Defense Attorneys
by Michael L. Brookshire and Stan V. Smith
Most of us have the general sense that we as human beings are worth more than the measure of our human “doings.”
But how much more. And to whom?
What constitutes the hedonic value of life? Society has shown a willingness to pay to prevent loss of life or injury to persons unknown, regardless of their earning potential. The ability to enjoy living itself is a valuable asset.
Unlike a lost earnings stream, life cannot be replaced with money. But fair compensation has routinely been determined in the past for pain and suffering.
By giving a jury sufficient background and knowledge about how society expresses the value of life, the difficult assessment process can be removed from the realm of speculation. Juries can think in terms of an objective range to estimate hedonic losses so that neither unduly high nor low awards may result.
The task is to inform jurors about how economists have measured the value of life in different ways. These measures reflect how society values life and give us valuable insight into how each of us (on average) values his own life and the life of others.
The value of any specific life is not directly observable. There is no explicit free market for life — we will never observe a market price. Because each life is unique with widely varying characteristics (unlike more homogenous commodities such as oil or wheat), the problems of valuing a unique life can seem much more difficult than valuing a lost earnings stream.
The Willingness to Pay Approach
The predominant economic model for valuing life is the Willingness To Pay (WTP) approach.
In this approach, the price associated with a change in the risk of death is estimated in several different ways through questionnaire studies, consumption studies, labor market studies and studies analyzing the cost and impact of regulations imposed by rulemaking agencies.
In these studies, the price measured is that associated with a small change in the risk of death. These studies do not focus on what we do pay to save the life of a particular person facing almost certain death, such as a baby trapped in a well, or a hostage imprisoned in the Middle East.
Our identification with the known victim can mobilize tens of millions of dollars of resources, sometimes even when the victims are whales trapped in ice floes.
Rather, the studies focus upon the saving of lives of people who for the most part are anonymous, unknown individuals.
These studies give us enormous insight into the issue of value since they reflect the attitudes and opinions of our contemporary American culture. This information is an important contribution to a juror’s store of knowledge for the purposes of arriving at a final conclusion.
One set of studies is based on data regarding what private citizens spend on their own safety, for items such as airbags, larger tires, smoke detectors, etc. These data reflect actual market values and transactions.
In questionnaire studies, economists have determined, for example, how much extra money people would pay to fly on safer airlines. From this information, the implicit value that the respondent places on his or her own life may be inferred.
A third set of data comes from the labor market. Economists measure how much extra a worker must be paid to work at a job with a measurable life risk, such as coal mining or high beam welding. The extra compensation is a measure of the value the individual places on his or her own life.
A final category of information comes for what government causes to be spent on the prevention of loss of life through regulation.
While sometimes as little as a few cents may result in significant lifesaving, the question is not how little can be spent, but how much is routinely spent.
Government agencies have various standards of the value of life to guide them in their decision-making regarding spending on safety measures. Undoubtedly, NASA now has one, surely for political in not solely for humanitarian reasons.
Federal regulations impose a cost of compliance on regulated entities, industry and government agencies alike. The implied dollar value per life saved can be measured.
The literature on the value of life has grown substantially over the past decade. It consists of a rich but highly technical body of information and analysis. Without having an explicit market price to observed, any inferential analysis will be less than perfect, but these studies reveal vital information.
The preponderance of results as to the value estimates range from the high several hundred thousands well into the several millions — few results are beyond $10 million, or below $500,000. This is a broad range.
But by taking the jury through the various estimates and the studies on which they are based (as well as the assumptions behind them), an economist can help a jury see that we routinely value life in the dimension of up to several million dollars for the statistically average person. Table 1 shows the results from several studies published in a recent survey article.
[insert table 1 here]
Just as different economists may arrive at different projections for the lost earnings of a person with one year of high school and no previous earnings history, economists may differ as to precisely what is the net hedonic value of life.
An economist can interpret the studies and provide information that can help a jury form its own judgment regarding the net hedonic value based on the estimates published in the literature.
From the estimate for the total value of life, we must subtract estimates of the labor component (earnings, fringe benefits, household services) for a statistically average person.
Further, since we include in the total value of life the value we place on preserving our financial security, we must also subtract an estimate for the value of this security to arrive at a net hedonic value. This net value may then be divided by the remaining life expectancy of a statistically average person to arrive at a hedonic value per year of life expectancy.
The important contribution of an economic expert witness with special expertise in this area of economics lies in assisting a jury to narrow the range of values appropriately and then to determine how that range is applicable to the case at hand.
The evidence that an expert economist can present serves as a valuable guideline which the juror can then integrate with his or her own moral, social, philosophical and spiritual values to arrive at an appropriate conclusion.
Even when that is accomplished, the juror must then weigh the importance of the evidence that the defense and the plaintiff present with respect to quality of life of the individual concerned, the specific circumstances in the life of the victim, and his or her ability to enjoy life.
An economist can present a probable range of the value of life. Only if the jury takes all the additional information into account to decide where on that range a given individual falls.
Limitations of this approach include the different categories of studies and the wide range of results. Further, individual characteristics beyond age, race, and sex — which imply life expectancy — are not easily considered by economists.
No single study can give the perfect answer as to the value of life, but the preponderance of studies with results in the high six-figure to mid-seven-figure range should be viewed as evidence of a consensus.
The Second Approach: Providing an Estimate of Hedonic Value of Life
A second approach to providing an estimate of hedonic value of life is based on the individual’s willingness to pay. Thus, it is based on the earnings of the victim and his or her own ability to pay to avoid a catastrophic event such as certain death.
An economist may estimate for a jury how much the victim could have paid to save his or her own life. For example, in Chapter 3, we saw (in Table 5) that the present value of Jack Doe’s lost earnings capacity, not including fringe benefits and household services, is $1,541,207.
In order to estimate what is the most Mr. Doe could have paid to save his own life, we can estimate the extra amount of money he might have made by working a second shift. An estimate of the hedonic value he may have placed on his life is the incremental earnings he may have been able to generate, equal to his first shift earnings.
We would generally not include additional fringe benefits since many of the typical benefits would not be increased by working a second shift. There would be no additional social security beyond a certain limit, no double coverage of health insurance, etc.
Many benefits such as company discounts cannot be easily monetized. Nor would we include the vale of household services, for obvious reasons.
A jury may conclude that working an additional 40 hours per week is unrealistic over the long term but working an additional 20 or 30 hours might be possible in order to avoid catastrophe. At 30 hours a week, the estimate for Jack Doe would be $1,155,904.
This approach is based upon a specific characteristic of Jack Doe: the present value of his earnings. The estimate of Jack Doe’s valuation of his own life increases with earnings potential. It implies that the more we earn, the more we are worth. Thus, a workaholic is worth more than a mother who chose to stay at home and raise children.
It is not a viable approach absent a prospective lost earnings stream.
The Third Approach: A Societal Willingness to Pay
A third approach is the societal willingness to pay when specific lives are at risk. For example, it costs approximately $15,000 to $20,000 a year to maintain a person in prison.
When society chooses not to execute a criminal but to incur these annual costs, it is implicitly placing a value on the life of the criminal. The costs of maintaining profoundly injured people under minimal health care at institutions for the indigent significantly exceeds the costs of prison.
When Society chooses to pay these costs to prevent the death of incapacitated people, it is placing a value on life. Undoubtedly, there are additional data regarding what we pay to save trapped miners, trapped whales, hostages, and others whose specific lives are in imminent danger.
This third approach may have considerable jury appeal. However, it consists of data from unique and unusual circumstances and thus may be best explained as providing background reference data for the case at hand.
For More Information…
Read additional sections from Chapter 9 of The Practice Book for Plaintiff and Defense Attorneys: