An Academic Study and a District Court Dispute the Hedonic Damages Theory
By Jerome M. Staller, Ph.D. and Scott F. Gibson, Esq.
The “hedonic damages” theory, under which some experts claim to be able to assign a dollar value to the “enjoyment of life,” has come under attack on two fronts recently — an academic study brings into great question the validity of such testimony, and an opinion from the U.S. District Court for the Northern District of Illinois categorically rejects the testimony.
Hedonic-damages experts claim to be able to calculate the value of “enjoyment of life.” As flawed as this claim is conceptually (How do you define “enjoyment of life”? How can you possibly measure something so subjective?), some jurisdictions accept this testimony. However, an academic study that has been universally ignored by the proponents of hedonic damages testimony severely undercuts the testimony’s credibility. It is clear from the study that such testimony will not meet the guidelines for scientific evidence outlined in Daubert v. Merrell Dow Pharmaceuticals Inc., 113 S.Ct. 2786 (1993). Even without considering this study, several courts have unequivocally rejected the testimony recently, citing problems with the Daubert guidelines.
There is no mystery as to why the hedonic-damages fad took hold ten years ago — hedonic testimony can significantly inflate a damages claim. While the hedonic-damages experts are unanimously vague as to how they arrive at the value of life, the values they put on the board in court are anything but vague. Various hedonic-damages specialists have placed the value of life at between $1 million and more than $8 million. This testimony is not limited to wrongful-death matters — plaintiffs in personal injury matters are claiming hedonic damages. In these cases, typically, a psychologists testifies on the percentage of reduction of value of life. If the “hedonic” value of the plaintiff’s life is $8 million and the personal-injury plaintiff has lost, according to the psychologist, 50 percent of his or her enjoyment of life, the damages are $4 million. At least two psychologists who testify in this area have developed handy scales for determining the percentage of reduction of the enjoyment of life.
The academic article most frequently cited as the basis for hedonic-damages testimony, “The Plausible Range for the Value of Life — Red Herrings Among the Mackerel,” by Ted R. Miller, Journal of Forensic Economics Vol. 3, No. 3 (1990) (itself a questionable survey of other studies attempting to place a value on what economists call a “statistical life”) puts the value of life’s enjoyment at between $1.5 and $3.5 million.
The 88 studies analyzed by Miller examine the relationship between expenditures and risk — what economists call willingness-to-pay. Willingness-to-pay studies include market studies (what people pay for increased safety such as smoke detectors or seat belts) and wage-risk studies (what people demand in higher pay for riskier jobs).
The theory behind the market studies is absurdly simple. As leading hedonic proselytizer Stan V. Smith, who started the hedonic-damages fad ten years ago with his testimony in Sherrod v. Berry, 827 F.2d 195 (7th Cir. 1987), explains it:
Assume that a person purchases a safety device for $700 and that device reduces the probability of his death from 7 in 10,000 to 5 in 10,000. By reducing his chance of dying by 2/10,000ths, or one chance in 5,000 at a cost of $700, economists would say that he valued his life at $3,500,000. In effect, if 5,000 people spent $700 each on air bags, one life would be saved at a total cost of $3,500,000. (Stan V. Smith and Michael Brookshire, Economic/Hedonic Damages: The Practice Book for Plaintiff and Defense Attorneys (1990)).
But what if there is a sale on air bags? And what about people who cannot afford airbags? Perhaps because the conceptual underpinnings of the market studies are so tenuous, the “hedonists” rely more heavily on wage-risk studies. These studies attempt to correlate wages and risk in various industries. The theory behind the wage-risk studies is that workers will demand more pay for riskier jobs. For example, police officers in New York may receive, on average, $100 more in annual pay than police officers in Palm Beach. The death rate among New York police officers may be 1 in 10,000 more than for police officers in Palm Beach, translating to a “hedonic” value of $1 million per life (10,000 times $100).
The wage-risk surveys examined in the Miller article, and the surveys on which hedonists rely, examine wage and risk on an industry-by-industry basis, rather than on an occupational basis. That is, clerks in the mining industry are considered to have the same risk of death on the job as men in the mines. Construction workers who walk high beams are considered to share the same risks as those who pour concrete.
Clearly, a survey by occupation (where, for example, truck drivers in the mining industry are in the same category as truck drivers in the construction industry) would be much more precise and valid. The one wage-risk study that does examine the correlation between wages and risk by occupation, however, has been universally overlooked by those who testify on hedonic damages, and for an obvious reason — the study shows that there is no valid statistical correlation between wages and risk.
The study, conducted by J. Paul Leigh and reported in his article “No Evidence of Compensating Wages for Occupational Fatalities,” Industrial Relations, Vol. 30, No. 3, Fall, 1991, statistically analyzed wages and risk in various occupations, rather than industries, and used data more recent than those relied on in the industry studies. Leigh expected results consistent with the results of the industry studies. To his surprise, he found absolutely no significant correlation between pay and on-the-job risk. His results were consistent using six different data sets, representing different time periods and a wide variety of occupations.
Leigh speculated on why his results diverged so dramatically from the industry studies. He observed that younger workers may have the riskiest jobs but may get lower pay because of limited tenure and workers may not accurately perceive their on-the-job risk or the degree of change in risk from one job to the other. Leigh also observed that the wage-risk models work only if workers act in a hyper-rational manner, yet it is unlikely that this rationality exists in the real world. “Irrationality when contemplating death may be universal,” Leigh writes.
Any testimony claiming to rely on these studies as an indication of the value of life thus falls short of the Daubert standards. In Daubert, the Supreme Court held that, in order to qualify as “scientific knowledge,” an inference or assertion must be derived by the scientific method.” (Daubert at 2795). A hallmark of the scientific method is reliance on valid and significant data. The data relied on by the hedonists do not, as Leigh’s rigorous analysis shows, meet that standard. The court also held that “submission to the scrutiny of the scientific community is a component of ‘good science.'” (at 2797) The hedonist’s hypothesis on wage-risk correlation was subjected to scrutiny and found wanting. Leigh’s study shows that wage-risk studies cannot be relied on as indications of the value of life.
Even without considering the Leigh study, courts are finding that the hedonic theories are unreliable and invalid. The most thorough recent discussion of hedonic-damages testimony is found in Ayers v. Robinson, 887 F.Supp. 1049 (N.D. Ill. 1995). This opinion eloquently discredits the proffered testimony of Stan V. Smith, the leading proponent of hedonic testimony (who is credited with starting the phenomenon in 1987 with his testimony in Sherrod v. Berry, 827 F.2d 195 (7th Cir.)).
The Ayers court takes special exception to Miller’s “Plausible Range.” Carefully deconstructing Miller’s methodology, the Ayers court notes that the results achieved by Miller are obtained by very subjective “adjustments” and manipulation of data. “To put it bluntly,” the court writes, “Plausible Range strikes this Court as a prime candidate for an Oscar in the most-misleading-title category.” (Ayers at 1061.)
The Ayers court also found that the testimony on an “average” statistical life was not specific enough to the decedent’s personal circumstances. The court noted that various estimates of the value of an “average” life fell between $500,000 and $9 million, which is too wide a range to assist the jury. The court even took Smith to task for claiming that the willingness-to-pay theory derived from Adam Smith’s Wealth of Nations: “Adam Smith is of course the undisputed godfather of modern economics and The Wealth of Nations his crowning achievement. Unfortunately for Stan Smith, the surname Smith seems about the only thing they have in common.” (Ayers at 1062)
In addition to the Ayers court, several other courts recently have found hedonic-damages testimony severely wanting. See Anderson v. Nebraska Dept. of Social Services, 248 Neb. 651, 538 N.W. 2d 732 (1995); Hein v. Merck & Co., 868 F. Supp 230 (M.D. Tenn. 1994); Kurncz v. Honda North America, 166 F.R.D. 386 (W.D. Mich. 1996); Montalvo v. Lopez, 77 Hawaii 282, 884 P.2d 345 (Hawaii 1994); Sullivan v. U.S. Gypsum Co., 862 F.Supp. 317 (D.Kan. 1994); and Wilt v. Buracker, 443 S.E. 2d 196 (W.Va. 1994), cert denied, 114 S.Ct. 2137 (1994).
Thus, the defense attorney faced with such testimony has ample ammunition with which to file a motion in limine seeking to keep the hedonist out of court. The first step in crafting such a motion is to determine, through deposition or by examination of a report, the hedonist’s background and the basis for his or her conclusions. The hedonists should be asked to define what the term “hedonic-damages” means. The hedonist should also be asked to explain the willingness-to-pay theory.
The motion should incorporate the answers, since no one can make these theories seem rational and objective. The motion should stress that “quality of life” is an abstract concept that cannot be defined and thus cannot be measured; that the willingness-to-pay surveys used by the hedonists are statistically insignificant; the willingness-to-pay studies give widely divergent values for the value of enjoyment of life; and that hedonic valuation does not meet the Daubert guidelines. An affidavit from a qualified economist on the shortcomings of hedonic testimony should also be included in the motion.
It is unlikely that any court, confronted with a comprehensive motion in limine pointing out the absurdity of hedonic valuation, would accept hedonic testimony. Indeed, it is surprising that such testimony has persisted for as long as it has.
Jerome M. Staller, Ph.D. is president of the Center for Forensic Economic Studies.
Scott F. Gibson, a litigator, is a member of Gibson, Ferrin & Riggs, PLC, 1423 South Higley Road Suite 110, Mesa, Arizona 85206.
This article originally appeared in For the Defense, a publication of the Defense Research Institute.