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Behavioral economics and the value of a statistical life

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Abstract

There are many possible connections between the value of statistical life (VSL) and behavioral economics. A list of topics includes endowment effects, risk salience, ambiguity aversion, present bias, reference groups, reference points, and experienced versus decision utilities. There are also nudges that connect to estimating or using VSL in government decisions, and cousins of behavioral economic research such as interpersonal heterogeneity, experiments, neuroeconomics, and the role of beauty or personal attractiveness in labor market outcomes. Current evidence suggests that VSL and behavioral economics best connect via (1) possible multi-attribute reference group effects and (2) a possible distinction between decision utility and experienced utility.

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Notes

  1. It is the Energy Employees Occupational Illness Compensation Program Act, Part B (U.S. Department of Labor 2001).

  2. In documenting Thaler’s Nobel Prize winning career Barbaris (Barberis 2018, p. 663) notes, “In the early 1970s, when Thaler was a graduate student at the University of Rochester, the rational expectations revolution had begun in earnest. Not surprisingly, then, his dissertation, in which he estimated the economic value of a human life, took a traditional rational approach, one based on comparing wages across professions with different rates of accidental death. One day it occurred to him that he might learn something by conducting some surveys. Specifically, he asked survey participants how much they would be willing to pay to reduce their probability of dying over the next year by 0.001, but also how much they would need to be paid in order to accept an 0.001 increase in this probability. When reviewing people’s answers, Thaler noticed something curious: the amount people were willing to pay to reduce their probability of dying was much lower than the amount they required in order to accept an increase in this probability, even though traditional economic theory predicted that the two quantities would be roughly equal. This was Thaler’s first encounter with the “endowment effect”, the most famous of the anomalies he studied: the finding that the amount people are willing to pay for an object of economic value is much lower than the amount they are willing to accept in order to give the object up. Thaler first described the endowment effect in a 1980 paper (Thaler 1980). He used not only the above example, but also other examples that he had come across …”

  3. For additional econometric background on estimating VSL from an hedonic wage equation see Kniesner and Ziliak (2015).

  4. For a general discussion of risk ambiguity effects, which are how risk aversion depends on income (the third derivative of the effect of income on utility) see Baillon (2017).

  5. For a complete background on theoretical models and implications of discounting in general and behavioral economic underpinnings in particular see Dhami (2016, Part 3, Chapters 9–11).

  6. The frontier estimation literature has focused on examining production/cost inefficiency by firms and ignorance of job/wage opportunities by workers. For econometric background see Kumbhakar et al. (2015) and Polachek and Yoon (1996).

  7. For the interested reader there is recent research on the value of life from the view of a murderous dictator. Dower et al. (2018) find that the amount of money Stalin would have been willing to accept for a reduction in citizens’ fatality risk during his interwar Great Terror was about 6% of the VSL in the U.S. at the time and about 29% of the VSL in modern India.

  8. For example, Grodner et al. (2010) examine how there are spillover effects on individual labor supply and earned income from a reference group that is like the individual both economically and nearby geographically.

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Authors and Affiliations

  1. Claremont Graduate University, Claremont, CA, 91711, USA

    Thomas J. Kniesner

  2. IZA, Syracuse University, Emeritus, Syracuse, NY, USA

    Thomas J. Kniesner

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Kniesner, T.J. Behavioral economics and the value of a statistical life. J Risk Uncertain 58, 207–217 (2019). https://doi.org/10.1007/s11166-019-09302-8

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