Introduction to Hedonic Damages

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


Intangible damages resulting from the loss of life have resisted objective quantification in the past.

Intangible damages from profound injury, and the loss of society and companionship have likewise been difficult to quantify.

This chapter explains the basic guidelines for providing economic expert witness testimony for the lost pleasure of life based on a model of hedonic or intangible damages in wrongful death and injury cases. We concentrate primarily on the loss of the pleasure of life in wrongful death cases, although the other intangible losses to which the concept can be applied are discussed.

Placing a dollar value on life may seem crass to some, but with increasing frequency juries are now being asked to do so — money is merely the yardstick of measurement. Thus, developing a model for the loss of life for litigation purposes has recently become very important.

Life may be priceless (we observe no explicit price) and irreplaceable, but its value can be estimated with a reasonable degree of economic certainty so that fair compensation for its loss can be determined.

Plaintiffs’ attorneys may find that juries can be presented with economic evidence as to the value of the lost pleasure of living, thus making some cases economically viable to bring to court. Such cases would include instances where the allowable income losses are small, such as those for the very young and the retired, for people who choose public service positions over more highly paid entrepreneurial positions, and for single people with no dependents.

The testimony can give a jury a concrete basis for discussing and deciding upon an award. In a case where the injury is not physically obvious, such testimony can help a jury recognize the seriousness of the hidden loss.

Defense attorneys may see that the objective process of valuing life can preclude runaway awards. This is especially useful where jury sympathy for the plaintiff on the issue of liability is likely to adversely impact their ability to assess fair compensation. This can happen especially in tragic accident cases against obviously wealthy defendants, including large corporations.

Also, defense attorneys may wish to use their own economist to counter a plaintiff expert who has set forth unrealistic estimates of hedonic losses.

The use of an economist to provide expert witness testimony can be extremely effective in the area of hedonic damages. However, since this area of forensic economics is more complex and newer, it is important to give great weight to engaging an expert who has thorough knowledge in the area.

An economist familiar with well-established methods of estimating lost earnings may be unaware of the pitfalls of estimation and testimony in the area of hedonic damages. It would be extremely useful if the expert also had substantial experience in testifying in court since the cross-examination is likely to be as arduous and difficult as may ever be encountered.

Yet, only a small percentage of economists have any expertise in hedonic damages and only a small percentage of these have experience in testifying and responding to intense cross-examination.

Adam Smith first suggested that wage differentials can be used to value the increase in the risk of death for a risky job.1 Ronald Ehrenberg and Robert Smith discussed the concept in greater detail and arrived at two important conclusions: wages increase with higher job risks, and workers who are least risk-averse will seek out riskier jobs that pay higher wages.2

Studies of wage risk differentials are among those published in recent years that reveal how life is valued.

Thus, the concept in economic science that life has a value beyond a labor value is not new. What is new is the development of an economic model to measure the value of life on the basis of a large body of economic literature.

Testimony based on this model has captured the attention of the American courts and the legal press since one of the authors first testified on this subject in a wrongful death action, Sherrod v. Berry,3 brought under the Civil Rights Act, 42 U.S.C. 1983.

Subsequent testimony in a medical malpractice injury case, Ferguson v. Vest,4 involving an injured, 62-year-old retired woman, also resulted in considerable controversy in the legal profession.

In affirming Sherrod, U.S. Court of Appeals for the Seventh Circuit wrote that, “… the testimony of expert economist Stan V. Smith was invaluable to the jury in enabling it to [determine] the most accurate and probable estimate of… the hedonic value of [decedent’s] life.”5

The case was subsequently reheard en banc, reversed and vacated on other grounds (the district court erred in admitting evidence that the plaintiff was unarmed); but with respect to the district court’s other evidentiary rulings and jury instructions, including those relating to testimony on hedonic damages, the appellate court advised the trial court on remand to “decide in light of this court’s prior discussions of those matters, specifically those found in our earlier vacated opinion.”

The hedonic value of life as an element of damages in court is also not new.

Many courts have allowed triers of fact to award damages for the lost pleasure of life in death and injury cases. What is new is that more and more state and federal courts are allowing expert economic witness testimony to assist juries in quantifying hedonic losses, acknowledging that there is much that economists can teach juries about how our contemporary society implicitly values life.

Some jurisdictions are interpreting wrongful death and pain and suffering statutes as expressly recognizing the loss of the pleasure of life as a separate element of compensable loss. Economists can provide useful guidelines for evaluating this loss.

The trial judge in Sherrod ruled that hedonic damages are not speculative; that the issue of speculative damages generally refers to uncertainty as to cause or origin of the damages; and not to the ability to precisely measure the loss; and “the fact that the hedonic value of a human life is difficult to measure did not make either Smith’s testimony or the damages speculative.”6

While some courts have barred testimony on hedonic damages, no state or federal appeals court has ruled against the admission of economic expert witness testimony on hedonic damages.

The terminology in state statutes and in case law, applying to various types of losses, is not fully consistent. Statutes and courts frequently distinguish between economic and non-economic losses as well as between pecuniary and non-pecuniary losses.

There is no clear agreement as to which losses constitute economic or pecuniary losses and which constitute non-economic and non-pecuniary losses.

It seems that when referring to pecuniary losses, case law and statutes generally mean those losses which have an actual money transfer associated with them — such as a paycheck — economic losses seem to mean those that can be readily valued in the marketplace.

But such distinctions can be murky: — the loss of fringe benefits (which include such items as company discounts) may not involve money transfers and may not be readily valued in the marketplace but is routinely calculated as a pecuniary loss.

Losses discussed in earlier blogs and the losses discussed in this blog fall along a continuum — from tangible to intangible — and from directly observed to indirectly inferred. Estimates for tangible lost wages are frequently based on directly observable past earnings.

The value of tangible lost benefits is typically estimated from directly inferred values, based upon the actual employer contributions.

The value of tangible lost household services is often indirectly inferred by using data for average household services contributed.

The pleasure of life is an intangible asset.

The loss of the pleasure of living in wrongful death cases, or the reduction in the pleasure of living in jury cases, is an intangible loss, indirectly inferred in part by using data based on averages or central tendency estimates.

Whether elements of hedonic damages are admissible in a given jurisdiction can sometimes depend on whether a court interprets them to be economic or pecuniary losses.

Since we can actually observe payments for preservation of life, the lost pleasure of life could be viewed as pecuniary loss that can be valued in monetary terms. Since lifesaving is readily valued in the marketplace, it could be viewed as an economic loss.

Courts’ interpretations will surely differ.

The hedonic value of life refers to the value of the pleasure, the satisfaction, or the “utility” that human beings derive from life, separate and apart from the labor or earnings value of life.

To determine hedonic loss, we seek to measure the value of human beings separate from the value of their output as mere “economic machines.”

The word hedonic stems from a Greek root meaning pleasure.

The word was used in the Sherrod trial and by the trial and appellate courts in their written opinions. Subsequently, the legal press has used the word extensively.

Because the word hedonic can be confused by a juror with the word hedonistic (meaning the devotion to pleasure), attorneys and economists frequently find the term problematic.

Alternatives terms, such as “net life value” (subtracting “money life costs” from “whole life costs”), do not seem to have taken hold in the literature. For the sake of consistency, we use the word hedonic in this book.

In referring to life’s pleasures, we do not mean to imply that we are measuring the value of pleasure in the narrow sense. The process of life is sometimes very pleasurable, but also sometimes intensely difficult. Life is fired at us daily, point-blank, presenting us with challenges, upsets, irreversible failures, and ennui, as well as pleasure.

Generally, however, we human beings find the whole challenge of the gift of life to be intensely engaging and satisfying —not only when we stare adoringly into a baby’s smiling face — but also when we endure life’s hardships.

In measuring the hedonic value, we are valuing the pleasure of life in the broad sense of the word.

Living is dangerous to one’s health. As a society, we cannot afford to reduce to zero the risk of accidental death or injury in every circumstance. Nor should the consequence of accidents always be borne by someone besides the victims.

But cost-benefit analysis valuing life, grounded on sound academic studies on the value of life, can help juries weigh the consequential losses resulting from the actions of tortfeasors. Expert witness testimony based on the economic literature on the value of life can greatly assist juries in framing appropriate awards. There is much useful information.

Some economists may not be comfortable in presenting such an analysis because it might not be accomplished with the same degree of precision that is customary in presenting lost earnings or business values. The relative degree of precision in the estimating techniques does not reduce the right of both plaintiff and defendant to a fair estimate of the loss, nor does it undermine the validity of the approach.

There are other instances where the measurement of losses can be less precise a process than an economist would ideally desire. Such examples can be found for every loss category discussed in this book. The forensic economist is always taking the best and most relevant data which he can find to reach sound conclusions and fair estimates for defendants and plaintiffs alike.

While Copernicus first asserted that the earth revolved around the sun, it was not until several generations later that Kepler was able to measure the speed and the distance with any accuracy. Precision was not required to adopt the heliocentric model of the solar system.

Likewise, while we may know the distance from New York to London with greater precision than we know the distance to the moon, we nevertheless did land on the moon, successfully and safely.

Over the past 20 years or so, there has been a substantial development in the methodology for measuring the pleasure of life. Increasingly, courts are ruling that economists can provide estimates of the value of life to a reasonable degree of economic certainty.

As more data is gathered and analyzed, the measurement will most likely become more refined over time.

Undoubtedly the concept will be the subject of considerable attention as it continues to be discussed by its proponents and its challengers alike.

To the extent that such testimony can help make awards fairer and more predictable, there will be an increase in the overall efficiency of the judicial process.

In this chapter (using an illustrative case), we lay a foundation for valuing the lost pleasure of life — independent of lost earnings — in a wrongful death case. We also present a second approach based on lost earnings and mention other approaches that have been used.

This foundation is shown to have application in evaluating the reduction in the ability to experience the pleasure of life in injury cases, in evaluating the loss of society and companionship to survivors of deceased and profoundly injured victims, and in evaluating punitive damages in product liability cases.

 

For More Information…

Read additional sections from Chapter 9 of The Practice Book for Plaintiff and Defense Attorneys:

 


1 – See Adam Smith, Wealth of Nations (New York: Modern Library, 1937), Book 1, Chapter 10.

2 – Ronald B. Ehrenberg and Robert S. Smith, Modern Labor Economics, 2nd ed., Scott Foresman & Co., Glenview, IL, 1988, pp. 258-281.

3 – 629 F.Supp. 159 (N.D.Ill. 1985), affirmed, 827 F.2d 195 (7th Cir. 1987), reversed on other grounds and vacated, 835 F.2d 1222 (7th Cir. 1988). For a discussion of this case see “Hedonic Damages in Wrongful Death Cases”, by Stanley V. Smith, ABA Journal, Vol. 74, Sept. 1988, pp. 70-74.

4 – Ferguson v. Vest et al., 3rd Judicial Circuit, Madison Co., Ill., 87-L-207. For a discussion of this case see “More Suing over Lost Joy of Life”, by Andrew Blum, The National Law Journal, April 17th, 1989, Page 1; and Inside Litigation, June 1989, Vol. 3, No. 6, Prentice-Hall, New Jersey, pp. 3-20.

5 – 827 F.2d 206.

6 – 629 F.Supp. 164.

 

 

© Smith Economics Group, Ltd. All rights reserved. | Tel. 312-943-1551 | Fax 312-943-1016 | [email protected] | 1165 N. Clark Street, Suite 600, Chicago, IL 60610