Critics love behavioral economics because they think it gives traditional economics the comeuppance it deserves, and this is a mistake.
New reports on Richard Thaler, who received the “Nobel Memorial Prize in Economic Sciences” this year usually mentioned, albeit in passing, Thaler’s doctoral dissertation on the topic of estimating the value of a human life. This topic is often taken to represent economics at its worst: economists trying to place a monetary value on something that is of infinite value.
Yet the centerpiece of the estimation approach is not about what value other people might impose on another person’s life, but on backing out what value people place on their own lives. Indeed, our own actions reflect that we do not place an infinite value on our own lives. We make tradeoffs between risk to our own lives and reward numerous times every day.
The nub of the estimation approach is easy to understand. (Actual estimations are more difficult.) It goes something like this: Say there’s a sale on an item you want to purchase, but the store with the sale is 20 miles further away than the store closest to you with the same item, but not on sale. If you purchase the item on sale you’d save $30 net of the added cost of getting to the more-distant store. (The gas, marginal wear on your car, your time, etc.). Driving the extra 20 miles, however, also entails additional risk: Traveling the additional 20 miles creates an additional one chance in 100,000 that you will be involved in a fatal auto accident. From your decision whether to make the trip for the sale, and the tradeoff you make between the risk and the reward, we can start to determine the value you place on your own life. If you make the trip, the implicit monetary value that you place on your life must be less than $3,000,000 (the marginal economic gain to you of $30 divided by the marginal increase in risk to your life of one over 100,000).
There are a host of complicating factors when attempting to calculate the implicit values we place on our own lives. But whatever those complicating factors, the underlying fact is that we all make those sorts of implicit tradeoffs all the time. The upshot is this: whatever the value we in fact place on our own lives, that value is not infinitely great. We don’t treat our own lives as though they are of infinite value.
This recognition is not a cold-hearted recognition of the tradeoff. Its recognition can sometimes help us to cut through nonsense to get to a real consideration of the risk to which others subject us.
One of my pet peeves is the common institutional platitude, “Safety First.” Well, in fact, if safety were truly an institution’s first concern, then the institution (the firm, the lab, the event) almost certainly wouldn’t exist in the first place. If we first make sure everything is safe as possible, then we would not engage in many of the most important things we do every day.
Companies are no different. What the “Safety First!” platitude sidesteps is recognition that firms are engaged, necessarily so, in tradeoffs between safety and other goals, including production and profit.
The fact of a tradeoff is not cold or calculating, or problematic. We all necessarily engage in tradeoffs in our private laws all the time in matters economic and non-economic. The question, though, is the actual terms of the tradeoff a particular firm or institution is making.
The problem with the “Safety First” platitude is the pretense that the firm in fact is not trading off risk and reward. It avoids raising the issue of the actual terms of that tradeoff between risk and reward to which a firm subjects its employees.
After all, it is possible that we value our lives more dearly than is implicit in the company’s tradeoff between safety and profit. Frank recognition of the tradeoff better opens the door, as Thaler and his co-author mentioned in a 1976 NBER paper, to “Adam Smith’s ancient suggestion that individuals must be induced to take risky jobs through a set of compensating differences in wage rates.” Recognizing the fact that tradeoffs are made of necessity is not cold or calculating. It is a first step to facing whether we consider those tradeoffs to be reasonable or unreasonable for ourselves, and insisting that our reward be commensurate to the risks that we face.