Economists are widely-seen as heartless.  Their use of the phrase “value of life” is often seen as damning confirmation of this heartlessness.  Nice people say, “You can’t put a value on a human life” and change the subject!

What’s striking, though, is that when you successfully cajole non-economists to put a dollar value on a human life, their numbers are vastly below the economic consensus.  Economists’ standard estimate is around $7,000,000.  Non-economists’ usually say under $1,000,000.  Their reasoning varies, but I’ve heard garbled versions all of the following:

1. People can’t pay more than they have, and most people have well under a million dollars.

2. People earn around $40,000 per year after taxes, and most have under 25 years left to work.  So if you multiply annual earnings by remaining working life, most lives are worth under a million.

3. People need most of their income to live.  So if you measure the value of life by people’s willingness to pay to stay alive, it’s probably no more than $10,000 per year.

Why are economists’ numbers so much higher?  Part of the reason is that economists detect blatant flaws in all three of the popular approaches:

Flaws with #1: When people bid for a house, their willingness to pay is emphatically not limited by their current possessions.  Credit markets allow them to borrow against future earnings.  When we estimate people’s willingness to pay for their own lives, we should perform an analogous exercise.  Maximum willingness to pay is limited by the present discounted value of everything people will EVER own – their time emphatically included. 

Deeper flaw: Willingness to accept is just as valid a measure as willingness to pay.  For small purchases, these numbers are fairly similar.  But for large purchases, they differ dramatically.  (Of course if you take this caveat too seriously, economics comes close to endorsing the view that every life is infinitely valuable, since most people will not agree to die for any sum).

Flaws with #2: This approach ignores opportunity cost.  You shouldn’t just include the value of the time people choose to sell.  You should also include the value of the time people choose not to sell.  In other words, if you’re going to apply this method, you should measure potential earnings, not actual earnings.

Flaws with #3: It’s simply not true that people in the First World “need most of their income to live.”  People can physically survive while couch surfing, eating beans and rice, and working three jobs.  And if this austere lifestyle is their only way to stay alive, most submit to it.  This is a key lesson of every horrific war of the twentieth century.

If you make economists’ recommended refinements, all three popular value of life approaches yield much higher answers.  But they’re probably still short of $7,000,000.  How do economists get to their preferred answer?  By using a totally different metric: Willingness to pay (or accept!) for a small change in the probability of staying alive.  Something like:

4. How much would you pay to reduce your probability of death by 1 percentage-point?  Alternately: How much someone have to pay you to increase your probability of death by 1 percentage-point?

$70,000 is a very reasonable answer to questions like this.  Once you buy that idea, simply multiply by 100 to get a $7,000,000 value of life.

But why is approach #4 superior to refined versions of approaches #1, #2, and #3?  Truth be told, superiority is not clear-cut.  The strongest defense of approach #4, though, is that human beings rarely choose between certain death and a giant pile of money.  Instead, they face an endless series of choices between a small probability of death and a modest pile of money.  So approach #4 is the best way to quantify the value of life decisions we encounter in the real world.

This remains true even if we know with certainty that one person will die as a result of a choice.  Only individuals value stuff.  So if each person faces a 1% chance of death, summing the cost each person assigns to his own 1% risk makes sense.

Or does it?  Parting thought: Almost everyone – economists and non-economists alike – strangely neglects a big part of the value of life: The value people place on the lives of the people they care about.  Human beings worry about each other, and most who die are missed. 

Yes, Social Desirability Bias leads us to exaggerate how much we care about strangers and casual acquaintances.  But we plainly genuinely care about family and friends.  So economists shouldn’t just ask how much you’d pay to reduce your risk of death by 1 percentage-point.  They should instead ask how much everyone including yourself would pay to reduce your risk of death by 1 percentage-point.  Unless you’re a total jerk, $7,000,000 a life is probably a serious understatement.