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a blog from young economists at Nova SBE


How much is your life worth?

Despite your strong beliefs that your life is priceless, for Governments’ it’s not worth more than a few millions.

Putting a price tag to life may raise several ethical concerns. However, it’s more common than you think and it’s not an exclusive issue of Governments, courts or insurance companies. Even you, in your day-to-day life, make decisions that easily illustrate this phenomenon. For instance, have you vaccinated yourself against human papillomavirus or was it too expensive? Did you change your old, flat tires or did you save that money to compensate the tax rises?

These are simple examples of what you could do to reduce your likelihood of death and your answers reflect how much you value your own life (which it’s not infinity).

Governments do the same to determine which policies/regulations to adopt. Briefly, they compare the costs of a certain policy able to reduce the risk of a premature death with its potential benefits, measured by the value of lives that will expectably be saved. There are several ways to estimate this value, all with the same underlying idea: how much would a person be willing to pay to reduce her likelihood of death? Legislators can either use stated preference studies – where they explicitly ask individuals this question –, or wage-related studies – where they simply observe the behavior in the labor market, mainly the wage premiums required to work in jobs with higher risk. After some calculations, researchers can get to – some people say – a very close estimate of the value people place in life – the value of a statistical life (VSL).

Why is this method not pacific?

I won’t even discuss the ethical implications of valuing life in monetary terms. In a perfect world, where no scarcity of resources – especially monetary ones – exists, this could be a pertinent question. Nevertheless, in reality, decisions have to be made and some criterion is needed to drive them.

Even when it comes to the way it’s calculated, I don’t give much importance to the claims that it does not fully consider the human idiosyncrasies and heterogeneity. I do agree that people don’t value life in the same way and their different risk profiles may affect their willingness to pay for risk reductions. However, in my opinion, if the sample inquired/analyzed is sufficient big and representative, at the end of the day, the differences are washed away and the result is quite reliable.

However, what about the countries asymmetries? Can we stay indifferent to them? Imagine scientists discover a vaccine able to make women immune to breast cancer. Simultaneously, the Governments of Portugal and Germany carefully assess the VSL to determine whether it should be covered or not. Assuming the same prices and risk reduction, the VSL is the only parameter that matters in their decision. Whichever method they choose to assess it, the VSL will likely differ, mainly because the ability – more than the willingness – to pay varies with income. Since the average per capita income in Germany is higher than in Portugal, it is likely that the vaccine becomes subsidized in Germany and not in Portugal.

But do we really agree that the benefits of risk reduction have a higher value in Germany (if the prices in Portugal and Germany are the same)? In other words, is saving a German life more valuable than saving a Portuguese one, just because Portuguese people are less willing to pay for the risk reduction?

Especially in times of crisis, it’s understandable that people are more willing to accept riskier jobs or less willing to pay for risk reductions. Therefore, the VSL are highly biased by economic conditions, as well as other cultural factors.  However, when assessing the viability of the same policy in different countries, should the VSL vary, possibly leading to different policy decisions?

For me, human life, whether it’s Portuguese or German, should be worth the same, regardless of budgets and economies. Even though the increased difficulty that it would represent, I believe that when it comes to the possibility of preventing death and illnesses, we should not talk about several VSL, but a single, comprehensive and global value of statistical life. This methodological change would inevitably imply costs, but will also represent an important step towards a more equitable and fair access to health and health care in the world.

Ana Margarida Lemos

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How much money would you pay for your mother’s life?

Everything in life has a price. It’s a dogma. Even though, when we think about life itself, the scenario seems to change.

Life is the only good we cannot buy, for any price.

The reason is simple: when we try to attribute a price, a statistic or even an economic value to someone’s life, we think about those who are close to us. How much money would you pay for your mother’s life?  It is always a delicate subject, trying to measure an abstract concept as Life. In the end, an enormous conflict can emerge from this statistical attempt to attribute a value to something that the Human Rights consider to be priceless.

Despite the already mentioned ethical problem, the situation changes when we talk about people that we do not know. If I was asked to estimate the value of a random person, I would have in count his contribution to the social, cultural and economic development of the national and global systems.

However, leaving to the common sense the valuation process of a Life may be notoriously ambiguous, providing a biased estimator of its value.

To better understand this process, it is fundamental to look at it as a coin with two sides: on one side, there is the religious and philosophy flank, arguing the incalculable value of each individual, and, on the other side, we have the economic view, trying to give an estimative to that value. It was from this last view that the Value of a Statistical Life (VSL) was born, occupying an empty space in this life’s measurement process.

The VSL is the “official” value that your life is worth, considering the binomial risk-reward. This concept comes from the necessity to clearly identify different types of “risk-consumers”, valuating each individual according to his “risk behaviour”. Driving an automobile, smoking a cigarette, being sexual irresponsible, eating a medium rare hamburger or drinking alcohol are, all of them, decisions that individuals make every day, reflecting how they value their health and their exposition to mortality risks. Many of these choices involve market decisions, such as the purchase of a hazardous product or working on a risky job.

Particularizing, and having this in mind, it is not outrageous that in Portugal (and almost everywhere) aircraft pilots, roofers or mining machine operators are compensated with higher salaries than those taking a homonymous job, with a lower health risk. This trade-off process between risk and reward is associated with the “risk-exposure” in labor markets, and it is a crucial factor on the estimation of compensating differentials.

Resuming, we can conclude that the measurement process of someone’s life, more than a personal point of view of each one, is a multi-complex process endogenously affected by the risk exposure of the concerned individual.

Now I see why my risk-lover friend that jumps by parachute is so well-paid.

Guilherme GG


On risky behavior and fate in Africa

THE following thoughts recently crossed my mind as I raced through a dirt road in Mozambique at way too much speed, in the company of 30 people (not including children, live animals and dead ones too) in the back of an old Mitsubishi Canter designed to transport… well anything except people:

1. What the heck am I doing here?

2. Do these people have any love for their lives?

I am still to come up with the answer to the first question concerning the situation I was in, but regarding the last one I will try to sketch a possible answer in the following paragraphs.

Call it braveness or naiveness, Mozambicans and Santomeans engage in much bigger risks more frequently than anyone I know. In particular, I have been amazed by drivers there (excess speeding in bad awful road/weather conditions) and public transportation conditions (overcrowded vehicles all long overdue a full inspection). I was also amazed that some hazardous behaviors affect not only the person involved but her loved ones too – for example when putting immense responsibility in children (over siblings, travelling alone, handling knifes, etc.) or engaging in risky sexual behavior in high HIV prevalence environments. But my amazement was not echoed besides in foreigners like myself, for all this – including the deaths originated by such perilous behaviors – is taken as rather trivial there.

These observations lead me to think that, in Africa, professor Pita Barros’ class survey to infer the value of a statistical life (i.e. the value of saving an anonymous life) would reach much lower values, even when adjusting for income and other factors. There is simply lower willingness to pay, I suspect.

I do not wish to pass judgment over sporadic events I have witnessed. But maybe… Are they unfortunately not so infrequent?

Some selected statistics (Angola was added for further reference):

– HIV incidence[1]: high.

Rate of HIV incidence (ages 15 to 49)

Source: Joint United Nations Programme on HIV/AIDS (UNAIDS), 2009 estimates.

And the inverse relationship is found in condom use.

Condom use during higher-risk sex

Source: Joint United Nations Programme on HIV/AIDS (UNAIDS), 2009 estimates.

– Road traffic deaths: high by world standards.

Road safety

Estimated road traffic death rate per 100 000 population.
Death rate: dark green: <10; light green: 10.1-20; yellow: 20.1-30; orange: 30.1-40; red: 40.1-50; grey: not applicable; white: no data.
Source: WHO, 2006-2007.

– Treatment of injuries: weak.

Age-standardized mortality rate caused by injuries

Source: WHO Data – World Health Statistics, 2004 estimates.

So why not:

– use more the condom?
– drive more responsibly?
– act more careful in general?

Why did I see the inverse, even in educated well off adults?

Perhaps…

– Because the value of a statistical life (VSL) in Mozambique and São Tomé and Príncipe is low? or

– Because of lower life expectancy and/or lower income? (And VSL need not be lower if one controls for this then.)

Lucky for me two researchers came to Novafrica’s first annual conference held this month and explained their take on this subject: regarding African travellers, yes, average VSL is low (close to zero!) even when controlling for income, life expectancy, lack of information about transport risks, liquidity constraints, etc. Their main explanation for this is “socio-cultural factors, and especially the perceived role of fate in determining life outcomes”. Indeed they estimate much higher VSL’s among non-Africans (!) in their sample “who report comparable incomes to African respondents yet are much more likely to avoid additional fatal accident risk (…)”[2].

The authors also shed some light onto another question posed here, pointing out that “the accounts of African fatalism have gained particular relevance (…) in explaining the rapid spread of HIV, and (…) in accounting for the risky sexual behaviors that underlie this spread.”

In conclusion, my observations seem to be only the tip of a giant African iceberg after all. Personally I tend to agree with the authors “socio-cultural differences” explanation. And despite (or because of) these puzzling aspects, those differences are why I will keep travelling to Africa.

Helena Afonso


[1] Data not available for São Tomé and Príncipe and Portugal in 2009.

[2] Léon, Gianmarco and Miguel, Edward: Transportation Choices, Fatalism and the Value of Life in Africa. Forthcoming.


The value of (statistical) life

Health can be defined in countless ways, and although it seems to all a obvious word is not something easy to define.  The word health comes from hale, which in turn means wholeness. We can then infer that health is a state of completeness well being, including physical and mental criteria. In fact “Health is a state of complete physical, mental and social well-being and not merely the absence of disease or infirmity” is the WHO definition of health since 1948.

It is a common way of greeting, to wish health to others (and to ourselves), and nevertheless not always our actions comply with our wishes. Do we really value health as we think we do? And life?

Actually, looking in an extremely economical/theoretical way – no, our actions contradict our idea that life is priceless. Health problems as a consequence of bad eating habits, smoking, lack of exercise, not to mention risk situations that everyone subject themselves to, or even not making yearly exams as to be sure that no disease have come unnoticed, are a daily problem in health care.

The opportunity cost of loosing 2 or 3 hours a week in exercise, avoiding our precious cheese, smoked sausage, the big amounts of salt or even the occasional trip to McDonald’s is to high, we prefer having the risk of getting high cholesterol and triglycerides than to forsake the typical fat and salty Portuguese cuisine. It is not by chance that a recent study of the Portuguese cardiology society shows that 54,3% of the 5583 individuals tested have a cholesterol level above the limit, 49% hypertension and 59% overweight. This leads to the 9 strokes per hour observed in Portugal, (the biggest incidence in Europe) and the fact that the third cause of death in the age group from 35 to 44 is infarct.

So we value our life less than infinite, but can we truly measure the value that we attribute to our life? Well economists can give the value of a statistical life. Even if this can be ethically question, it is true that is more close to reality than the idea of an infinitely valuable life.

  Analysing the price you are willing to pay in order to decrease a certain risk probability it is possible to determine a rough estimation of this value, which can be traced back to some millions of Euros/dollar/etc.

Why is this question fundamental, well, to plan a health care system this questions are truly important to use standard economic tools, and for that you need the benefits of a certain measurement. For this, as in most economic subjects you have to model, simplify and transform variables that by their nature are not analysable. Is it ethical to put a money value on life? Well that I cannot tell, but more than useful is necessary and makes sense. As Milton Friedman said “…theories should be judged by their ability to predict events rather than by the realism of their assumptions”

 

 

http://www.medicalnewstoday.com/articles/150999.php

http://medicosdeportugal.saude.sapo.pt/utentes/doencas_cardiovasculares/rastreio_nacional_confirma_portugueses_com_colesterol_a_mais/1

 

Maria Roque Martins, nº540


How can you put a value on life?

If I was to ask you how much you consider your life to be worth, what would you answer?

Most of us can not give a definite number for the value of our lives, not even an approximation. Some would probably say that  the value depends on your expected future income and your life expectancy. Others might say that it is connected to risks and pay-outs, much like the approach used by insurance companies for deciding the premium and possible future payments connected to a specific insurance.

From an economic point of view the value of a life is connected to our opportunity costs, that is  the “cost” of the forgone products after making a choice. In economics we consider the value of a statistical life when putting a “price” on a human life. A statistical life is a notion for the value of saving the life of one person randomly picked from the population. This is very different than the individually percepted life value we assign ourselves or someone we know. Emotions make the difference between a subjective and an objective answer to this very difficult question. But questions are raised when we talk about a statistical life. Should every life have the same statistical value? Should the value change according to age, income, education or health status?

The reality is that the value of a statistical life do change with age, health status and so on. Recently there was a news story in Norway about a cancer medicine for a type of melanoma that could possibly extend a 68-year old man’s life extensively. Unfortunately the price of the medicine, approximately 100.000 euros per patient for the whole treatment, was too high compared to the expected effect it would have on the disease. Thus, a life and death decision was made on behalf of a small group of people with no other alternatives for leading a “normal” life. The 68-year old man with children and small grand-children could have enjoyed many more years, had he only been offered the medicine. From an economic point of view this may be a correct decision, but what about the ethical or social point of view? Is this man’s life worth less than 100.000 euros?

Problems arise when the health care systems can not always take the social or personal point of view into consideration. Is it possible that health care to a certain degree has become an institution based on profits, margins and return on investments? They can not take emotional considerations in the valuation of a life, because then the value of a life would reach astronomical heights and undermine the system in place. Unfortunately, the focus of health systems in most cases is not what we personally wish it to be. 

 

Lene Didriksen


How to value a life

In economics, when talking about the valuation of a life, the concept of “a statistical life” is commonly used.  This means that you should not think of the life of someone you know, or your own life, when trying to figure out how much it’s worth to spend to save a life. I can see that this is the rational way of thinking. I can even see that it makes sense. But how do you handle it when this statistical life suddenly is the life of a loved one? When you are at risk of losing someone you care about, wouldn’t the concept of a statistical life just be provocative? Don’t they deserve the best treatment possible, even if it would cost society more than you can ever dream of paying back in taxes etc.?

Last year I got some personal experience in this matter. A friend of mine got a blood clot in her lung. Luckily, she got to the hospital in time, but it could have been really dangerous. The reason for the clot was this genetic disease that could have been easily detected with a simple blood sample. The test isn’t even expensive. But since it will be expensive to offer it to a whole nation, people aren’t offered it unless there is strong suspicion of the disease. When I heard this, I was really upset. I thought that it should be more important to save a life than to save money.

Of course, the story has more than one side to it. The genetic disease is rare. It would cost a lot to test everybody, just to discover some few cases. And should this test be prioritized over other tests that may save even more lives? I don’t know. If it didn’t happen to a friend of mine, I would probably answer no to that question.  Decisions like these are hard to face.  Hard, but necessary.     

Solveig Lillebø

 


Do low qualified workers underestimate the value of life? First appraisal for Portugal

Portugal is intensively seeking for FDI, some announcements were made either by AICEP (Portuguese Agency for Investment and External Commerce) or the Ministry of the Economy and Employment. For example, two of them are related with natural resources extraction: copper and zinc mining (Neves Corvo ores – investment by Lundin Mining) and gas (joint venture between Mohave and Galp Energia). Why are resources’extractions important for a health economist? Well, these activities have higher accident probability for workers and so they tend to be riskier. If there is a larger risk of fatal accidents (i.e. dying) and yet there are people willing to work on them this means we have a measure or proxy for life’s value. Indeed, in Portugal for 2008, there are more 62 fatal accidents in mining and quarrying per 100,000 workers relatively to all other economic activities. Putting this into probability terms, the risk premium is expected to be 0,062% higher for mining and quarrying compared to other sectors. Notice the equivalence in the interpretations. On the latter number we say that we expect 0,062 more deaths in the mining than on the rest of the economy per 100 workers, whereas on the former we expect 62 more deaths per 100,000 workers, on average, for 2008 Eurostat data.

That was the dark side, the cost-side. What about the bright side or the benefits side? If the activities are riskier we expect to have higher wages compared to the national average for all other sectors. This wage setting is agreed between firms, unions and the government and thus we can assume that there is an overall consensus around the value established. According to ILO data, wage for mining and quarrying in Portugal for 2008 was 880€, against the national average of 840€. Most miners have low level of education (years of schooling equal to 4) and average population has 8 years of schooling, and an additional year of education increases wages by 9,7% on average for Portugal, Pereira and Martins (2001). If this is so, corrected by education, miners’ salaries should be 582,5€ rather than 880€. Thus the wage spread, this is, the difference between the actual wage of mining and quarrying workers and their expected wage given their levels of education is 297,4€.

From an average Portuguese individual point of view it is only worth to accept the job if the benefit overcomes the cost such that:

 

Remember the risk premium in paragraph one is measure per 100 workers. At the individual level he wants to know his own share of higher likelihood of death. The wage spread comes multiplied by 14 to get a yearly measure (12 months plus the 2 subsidies Portuguese workers received by law. Each subsidy is equal to a monthly wage.). VSL stands for Value of a Statistical Life and it’s defined as the value society gives to life of a random person in an economy. One of the approaches to calculate VSL is simply this risk premium approach. Measuring how much one is willing to accept/receive in income for exchange of higher probability of death.

 

Comparing this value here with other estimations for VSL throughout the world, we see that this number is within the boundaries (Miller, 2000). In that study values range from 600,000€ to 7,5 million €. Surprisingly (or not) Moore and Viscusi (1990) also present a value of 6,1 million € at 2008 prices.

This article describes one more piece of evidence of how much society values life unconsciously – rule of thumb is from 5 to 12 million €. In this case the Portuguese society and its mining sector were analyzed. The final value seems to be consistent with previous works for other countries.

This topic is especial relevant if we take into account the international context of South Africa and Spain’s strikes for more rights on the mining sector, in short the discussion is mostly around compensations and wages.

 

Informative Table

Variable

Value

Sources:

Risk Premium

0,062% (per 100 workers)

Eurostat

Wage spread

297,4 €

ILO

VSL

6.717.351 €

Author’s calculations

 

References:

Pordata; Eurostat; ILO Database;

Prós e Contras, 16th of July 2012-09-13

Jornal Público;

Jornal Negócios;

Pereira, P. and Martins, P. (2001), Returns to Education and Wage Equations, IZA DP no. 298, Institute for the Study of Labor, Bonn;

Miller, Ted (2000), Variations between Countries in Value for Statistical Life, Journal of Transport Economics and Policy, Volume 34-part 2, pp 169-188

Moore, Michael and Viscusi, W. Compensation Mechanisms for Job Risks, Princeton: Princeton University Press, 1990.

 

 

Gustavo Almeida


The value of life – how a company tried to compute it and how it failed

A famous and scandalous case is the Ford Pinto in the 1970s. The car manufacturer was accused that in rear-end collisions the tank would rapture easily and light the whole car. As a consequence passengers could burn to death in even small car accidents. To prevent the event from happening, Ford would have had to install some additional devices in the Pinto. But on the contrary, the company did not implement the device. The justification was based on a calculation. Here are some figures of Ford’s calculation:

The device would cost some $11 more per car. The analysis led to 137 million of additional costs for Ford. On the other side, assuming 180 more deaths and adding costs of lawsuits, damage payments, car damages and other compensation etc. resulted only in around $50 million. Afterwards, Ford also practiced lobbyism in order to prevent new, stricter regulations in car manufacturing.

That scandal raised an enormous media echo and was the starting point for a discussion how Ford tried to measure the value of life. Instead of being a proactive company setting an example in terms of safety and social responsibility, Ford focused solely on costs. The additional expenditures were reason enough to boycott the demands of the population to install the necessary safety devices. Ford did not include the value of life as an ethical value. It simply added additional costs of lawsuits and compensation payments.

Ford also used the approach of a risk premium value of life: If the consumer does not wish to face the additional danger in case of a rear-end collision, he or she is free to purchase another car from another car manufacturer. The willingness to pay more for a safer car is the consumer’s choice. Ford is not responsible for the choice, neither for the accidents. “People cause accidents, not cars” was a famous quote in that discussion.

On the other hand, Ford was under highest pressure in producing cheap cars. The market for small cars was highly competitive with major competition from Volkswagen. In order to stay profitable, Ford had to increase efficiency and cut costs wherever possible.

Although Ford defended its position for many years and kept on producing unsafe cars, it suffered great damage in brand image and damaged the name of the Ford company. These additional costs for advertising and marketing were obviously not added to the value of life.

Is that case still relevant today? Fortunately, not so much. Today’s consumers are much more demanding and safety has become the first priority in the car industry. A scandal like the Ford Pinto case would be a PR disaster for every company.

For more information:

http://www.wfu.edu/~palmitar/Law&Valuation/Papers/1999/Leggett-pinto.html

http://florinpopa.files.wordpress.com/2011/03/ford-pinto.pdf

http://www.corporatenarc.com/fordpintoscandal.php

And a discussion with Nobel prize awarded Milton Friedman

http://philebersole.wordpress.com/2011/08/11/milton-friedman-on-the-price-of-human-life/

Tomasz Pierog