What is the Value of Life?!

This blog post is not going to be as existential as the title may suggest. Instead, I am going to try and explore the economics of placing a value on life as well as considering some of the ethical concerns this has a tendency of raising.
The first point to raise in this article is the difference between the economic use of the phrase 'value of life' and the more general understanding of the term. 'Value of Life', often prefixed with 'statistical' (life), seeks to assign economic value to reflect the quantitative benefit of avoiding loss of life. Simply, this value reflects the economic cost of a fatality and the benefit of avoiding said fatality. In statistical terms this represents the "cost of reducing the average number of deaths by one" and is a useful component in the calculation of risk and cost-benefit analyses so central to economic planning. This is aligned with the neoclassical economic perspective as an essential component within responsible governance.
Because society has limited resources that it can spend on health and safety improvements, it should obtain the greatest benefits for each dollar spent, and ascertaining an appropriate value is necessary to that effort. ... To resist placing a dollar value on a statistical life is to abdicate any sense of rational decision‐making in the regulatory realm Brannon 2004
In contrast, the way that 'value of life' is perceived in general use relates to the more intrinsic importance and worth of life rather than a technical statistics term. This can lead to sensational headlines that warp the implications of this valuation when actually the two notions are pretty unrelated and it is misguided to interpret the statistical term as an authority on the worth we associate with our own lives and the lives of those around us.
These economic ‘values of lives’ are employed wherever policymakers are confronted with a difficult trade-off between safety and other desirable features such as speed, deliverability or cost-effectiveness. Policymakers aim to achieve a balance by weighing up these concerns. If there is too little consideration for safety, lives may be needlessly put in danger. However, it is equally important to recognise that all human activity involves some degree of risk; if there is excessive concern for safety, worthwhile policy changes can become impractical or unaffordable. The VSL is not an attempt to directly evaluate the worth of a human life, but a tool that allows policymakers to strike a balance between too much and too little safety risk.                                                                              - oxera.com

So how does an economist determine the 'Value of Statistical Life'?
According to the OECD there are 3 main methods used to identify this value.

  1. Cost of Compensation- this method looks at how much insurance companies payout in the case of an accident to determine how life and damage to life is valued.
  2. Human Capital- a more future oriented approach places a value on the potential a life had to give considering the accumulation of 'human capital' that includes the given individuals skills, education, qualifications and knowledge. Thus the loss of future earnings in the instance of loss of life is used to produce a value in this method. This has been criticised more recently as lacking the holistic approach intrinsic to economic life, with less tangible goods such as leisure failing to be taken into account. Moreover there is an implication that if you do not have the capacity or skill to be employed your statistical life has no value, something that seems inherently flawed.
  3. Willingness to Pay- this method is a current favourite for life valuation. It entails asking individuals how much they are willing to pay for some given safety measure that reduces their exposure to life risk. We can see this being implicitly used when workers who have riskier jobs are offered higher wages. This effectively asks the labourer to make a trade-off between safety and money. Some individuals may require lower or higher wages depending on the value they place upon their safety, which is equivalent to their 'willingness to pay' to ensure safety.

Are all lives values equally?
In spite of our clarification that statistical life is a separate concept to actual life, it may still be shocking to note that in fact, different values are used in different contexts, countries, projects to quantify life.
Under the willingness to pay method, it would follow that people with lower incomes may have a lower willingness to pay than those with higher incomes and this could factor into WTP values provided even if participants are told to disregard their income. On a international scale, this is made further evident with the value of statistical life rising in line with GDP per capita.

According to Shepard and Zeckhauser (1984) our willingness to pay increases until we reach 40, at which point we begin to become more indifferent towards risk and our willingness to pay decreases.

Ethics of Life Valuation
Some final consideration I wanted to put into this article surrounds the ethical implications of using life valuation techniques.
Economics has traditionally been able to maintain its credibility by relegating uncertainties in knowledge and complexities in ethics firmly to the sidelines.                                                                                       Funtowicz and Ravetz, 1994: 197
Is it comparable?
As mentioned previously, the value of statistical life is important for its inclusion within cost-benefit analyses. However should we be stating that this value is a statistical term in the same way that consumption benefits from a project or increased speed can be? Arguably, this is too crude a simplification, and by attaching a value to human life, this becomes merely another cost or benefit to weigh up within an equation with no more importance than any other variable. Whilst this is countered somewhat by attaching high value to human life, the implication remains.

What discourse is created within society?
Despite this article's emphasis upon statistical and actual life being different, statistical calculation has an impact on reality. This is particularly evident in our discussion of how the value of life an differ in line with age, risk preferences income etc. Much like a correlation between young people not ing turnout to vote in general elections and the lack of attention from politicians on the issues of younger generations, if people within certain groups express lower willingness to pay than others their lives may not be protected so vigourously within project formulation and creation because in a statistical sense, the loss is not as great.
This is alarmingly demonstrated in the below email included in a presentation by Clive Splash
This email, sent from a chief economist of the world bank makes the suggestion that polluting industries should be moved to developing countries with lower wages (as we have discussed wages can encapsulate willingness to pay figures that have also been shown in this article to be lower in countries with lower average incomes). Thus implications of certain lives being valued differently or at least in accordance with the willingness to pay model is problematic from an ethical glance.

Is life valuation implicitly preference utilitarianism and is this desirable?
Preference utilitarianism values actions that fulfil the largest possible number of personal interests. Whilst at face value this may seem unobjectionable and fair, there are further implications for equality. Whose preferences are being prioritised? Are we willing to sacrifice certain preferences in order to rather strive for greater international equity? Such questions challenge the assumptions made within some economic life valuation and reinforce that these are not obvious approaches to take.

Game of Thrones and economics

I bought. I saw. I wept. After spending a full 5€ on a Sky TV Ticket trial and setting myself the challenge of a lifetime, I am here to announce that I have watched all eight seasons of Game of Thrones within just four weeks (and I even have seven days left). To this day I am surprised that I wasn't spoilered (at least not too much, for some reason I even thought Khal Drogo was going to return???) but in retrospect, I wish someone would've told me to save my time and stop watching after season 6. Because while the first few seasons were amazing (despite a smaller budget) the last two seasons came with a number of disappointments. There is an abundance of fan theories and explanations as to why the ending was so disappointing, but maybe economics can help explain part of the reason why.

Satisfying an entire fandom after years and years of watching (or in other cases reading) is almost impossible. Whether it's Marvel's Endgame or Game of Thrones, regardless of what you do there will be critics. In economics-world, this conflict of interest is illustrated with the principal-agent problem. Mostly applied in the context of firms, the principal is the one in ownership of the firm and most interested in high profits, the agents are the workers of the firm. They have (to some extent) control over how profitable the firm will be by exercising their desired level of effort during their work. It's called the principal-agent problem because the actions of the workers cannot be controlled by the principal. The owners of the firm would like the workers to put in 100% effort so that the firm maximizes profits but (watch out, assumption alert) workers don't care about the firm's profits, only about their salaries. An entire area of economics is dedicated to resolving this problem and finding out how to effectively incentivize workers so that the firm maximizes its profits. So, what on earth does this have to do with Game of Thrones?

In this scenario, we - the audience - are the principal and the writers of GoT are the agents (let's keep George out of this equation for now). Presumably, we are far more invested in the outcome of the show, the fates of our characters and a satisfying ending than the writers of the show. The writers know they will be paid for their work one way or another, even better they already have their next gig lined up. We have different preferences, the audience wants a well-written, smart and thoughtful ending whereas the writers want to move on to their next project. This is how Starbucks-cups in crucial scenes and awkward dialogues happen. Likely, the writers' incentives have changed over time, during the first few seasons they had to prove themselves and make sure the show gets renewed for another season, but once you know this is the end why would you put in some extra effort to make it a good one? 

Sadly, there doesn't seem to be a way for fans to have more of a say in this issue. While many true believers started a change.org petition to have the final season re-done, this is unlikely to happen. The backlash over the last season could impact the writers' future employment (especially on the Star Wars movies) but again how much power do we really have here.

The only thing left to do is indulge in fan-theories about alternative endings and Youtube videos explaining what was wrong with the ending scene by scene. The only other solution I can come up with is either to only have ultra-fans write these shows or give the original authors of the books a veto, but I don't think GoT would have happened under these conditions.

The Reality of the Fiat Monetary System

Something I have noticed since being at university and being trusted with money that isn't really mine (read overdraft) is how the numbers on my banking app don't seem very real at all. Sure when I buy something the balance goes down and when I put an hour in at work the number increases but there is a loss of tangibility that can make this seem less scary. As it turns out, this perception isn't entirely misguided.
In 1931, Britain abandoned something called the gold standard. The gold standard was a system where the currency used in a country was based upon fixed quantities of gold. So technically your bit of currency was transferable for some decided weight in gold. This meant that the value of currency was evident (because everyone knows gold is precious and expensive). Britain was not alone in its move away from this system, with most other countries abandoning this standard in the 20th century. Certainly the Great Depression was not conducive to banks sustaining their gold reserves under this system. What then replaced this system of monetary organisation? If you have read the title of this article you can probably make the (correct) educated guess that the fiat monetary system is what now defines our money. The difference between the gold standard and fiat money is that fiat money holds no intrinsic value and instead has simply been declared to have value and exist as legal tender by the government. A number of benefits are often cited in regards to this shift in monetary valuation https://www.stlouisfed.org/timely-topics/the-gold-standard/videos/part-4-benefits-of-a-fiat-money-system however the debate continues today.
Regardless, what I think is the most interesting quality of the fiat monetary system is its reliance upon perception. If people begin to doubt that fiat currency has any value, a fiat currency collapse can be instigated and in fact this life cycle of fiat money has occurred throughout the history of its use. Let's consider a potential trajectory of fiat money:

The government replaces commodity backed currency such as the gold standard with instrinsically valueless currency.

With no need for currency to be backed by any commodity or tangible measure of value, government has the capacity to just print more money. However, this can lead to inflation, meaning that you need a greater quantity of the currency for the same product (prices increase because the currency is holding less value). This means that the purchasing power of said fiat currency is reduced; you get less stuff for your £££.
If inflation becomes too extreme and the purchasing power of the fiat currency declines drastically, the population may begin to lose faith in the currency. When people no longer believe fiat money holds any value, the currency becomes worthless.

So in conclusion, perception is a powerful part of economics and economic institutions are by no means perfectly strong. But just because fiat money technically doesn't have any value, don't let that justify your urge for a student loan day splurge, you may still regret that...

Paper Summary: Closing the Gap: The Effect of a Targeted, Tuition-Free Promise on College Choices of High-Achieving, Low-Income Students

I recently started binge-watching Games of Thrones (yes I am late, but I did read the books, so back off (also I have not finished yet so no spoilers please)) and tried to find a connection between the show and economics for this blog but after watching approximately 50 hours of TV over the course of one week my brain was mush. Maybe I'll return to this idea at a later point.

Instead, I have decided to summarize an economic research paper by some amazing economists.
Susan Dynarski, C.J. Libassi, Katherine Michelmore, and Stephanie Owen authored the paper "Closing the Gap: The Effect of a Targeted, Tuition-Free Promise on College Choices of High-Achieving, Low-Income Students". You can find an abstract of the paper here.

In their paper, they discuss an initiative that attempted to increase the attendance of high performing, but low-income students to a highly selective university. In the U.S., low-income students with similar qualifications as their peers are less likely to attend college, an observation that is even more pronounced at highly selective universities. Given that selectiveness at universities (as well as attending university in the first place) can have a significant impact on future income and career prospects, it's important that high performing students get a chance at this regardless of their family's income. Apart from these individual benefits of attending a highly selective university, society can also benefit from more diverse voices in all kinds of professions. Low-income students are likely to have faced different hurdles in life and offer a different perspective on a variety of issues.

While universities don't actively discriminate against low-income students, other barriers might discourage these students from applying in the first place. The barriers discussed in the paper are uncertainty about their chances to get into a highly selective university, overestimation of the net costs of attending university, and highly bureaucratic procedures when applying for financial aid. To overcome these issues the students need to be reassured they are qualified to attend the university, informed about the costs, and the bureaucratic burden of financial aid needs to be reduced. The paper introduces the scholarship program "HAIL (High Achieving Involved Leader)". Basically, students fitting the profile were contacted by the University of Michigan (the state's most selective college) via mail and (1) encouraged to apply, (2) promised four years of free tuition if they are admitted, and (3) all of this without having to fill out any financial aid forms. Additionally, parents and school principals were contacted to provide further support. This, alongside (1) intends to assure the students that they have good chances of being admitted and encourages them to at least try. (2) reduces the financial burden on low-income families and (3) removes the bureaucratic nightmare of applying for financial aid. Crucially, these students would be entitled to this level of financial aid if they had applied before HAIL came into effect, the program simply takes a more proactive and less bureaucratic way of informing students about the support available to them. At the same time, all of this comes at little cost to the university.

Overall, the program has proven to be very successful in reducing this gap, see here for a breakdown of the exact effects and numbers.

Source: https://www.nber.org/digest/mar19/w25349.shtml

Why is this study important? Well, as mentioned above, there are individual as well as societal benefits to encouraging students from diverse backgrounds to apply to highly selective universities. Hypothesizing about the reasons that keep these students from applying and designing a study to target these barriers allows admission teams at universities to identify effective ways to improve the current income gap in their students' backgrounds. This study gives universities a good starting point to design such programs.

Lastly, I wonder if the informational side of this campaign could be used to address other diversity-related issues. Economics has a problem of attracting women and students from minority backgrounds to its profession, for example, women account for only 28% percent of economics staff at U.K. universities.  Perhaps, having universities contact students that took economics classes in high school (or in the U.K., at A Levels) and informing them about the economics course at the university alongside explaining the application process could help improve these numbers.

Game Theory and Love Island

Not even a month into my summer holidays and I have already invoked great disappointment from my family members. Yes, that's right, I have been watching Love Island, and I have been enjoying it. For those unfamiliar with the concept of the show, Love Island is a show where a bunch of conventionally good looking guys and girls get put into a luxury villa with the sole purpose of 'cracking on' with each other and finding "love"; the escapades of the villa are then aired every night to the British public (except for saturdays). You may be intrigued as to how this is in any way linked to something meaningful but for the remainder of this post I am going to be using love island to illustrate game theory. In particular, I am going to try to explain the security dilemma and the prisoners dilemma using tropes from the competition. Because maybe in this context, love is just a game.

Security Dilemma
An exciting point of the series has just begun this week- the islanders have been unexpectedly split from their partners, with the girls being sent to 'casa amour', a new villa with 6 new guys. Meanwhile the boys remain in the original villa with 6 new girls to live with. Loyalties are being tested in even the strongest couples. Let's look at the example of Curtis and Amy to illustrate the game within this situation.
Curtis and Amy have been inseparable from their first episode together, with both parties vowing that no matter who came into the villa, their heads would not be turned. There are two options available to each individual; either they can remain loyal to their original partner or they can crack on with somebody new. If both Curtis and Amy found someone new they would both remain coupled up for the next part of the show (with new partners). If Curtis and Amy both decided to remain loyal to their initial coupling they will be reunited after the girls are allowed to return to the original villa and will remain in the show as a couple. However if for example, Curtis decided to couple up with a new girl whilst Amy remained loyal, not only would there be some heartbreak, Amy would then exist in the show as single, making her vulnerable to elimination. The same result applies for the reverse. I have put these outcomes into a payoff matrix to help visualise the game

Purely considering these outcomes as separate from how much Curtis and Amy trust each other, the option that guarantees security for each individual is to 'crack on with someone else' because then regardless of what the other person does, they will remain secure in the competition. An important element in this game is that neither person is able to predict with certainty what the other person will do or is considering and so the safest option is to maximise the utility of the individual.
We can see this security dilemma in its most common use within security politics and international relations
In the context of geopolitical security measures, not knowing the military capacity or intention of another state leads to the same security dilemma. Whilst the most beneficial outcome is for both countries to hold out on building themselves up militarily, the attack option is the only option to guarantee security. This can lead to an arms race as each nation continues to preemptively bolster their military in anticipation of hostility or threat that may not even have been voiced in order to prevent a situation of submission to the other nation.

Prisoners Dilemma
A second example of game theory used in Love Island is a version of the famous prisoners dilemma. In the final episode, the couple that wins the competition faces a final challenge. The couple is asked whether they want to choose love or money. A variation of split and steal, the contestants in the past (more recently this has been altered slightly) have been asked to place their answer into an envelope which is then revealed. The couple make this choice independently and do not see what their partner has selected. If both contestants choose love, the £50 000 cash prize is split 50/50 between them. If both contestants choose money, neither of them get anything. However if one of the couple choose money whilst the other chooses love, the contestant who chose money is awarded the full £50 000. Again I have attached a payoff matrix to illustrate this
In this situation, there is an incentive to choose money as this provides the individual with the highest payoff, however if both choose money neither win anything. This encapsulates the 'doomed' dilemma. Of course in Love Island where you are playing for a lot more money once the show is finished through public appearances, there is also an incentive to remain publicly popular. It is maybe unsurprising then that nobody has chosen to steal the money yet. However other game shows are less constrained by such problems. See the clip below for a version of this dilemma where the participants are able to communicate before making their decision, contributing a further psychological game to the situation.

So maybe there is some value to watching Love Island after all right?
P.S. for more game theory and TV show cross overs read http://www.shecon.co.uk/2018/10/game-theory-and-drag-queens_22.html