Hedonic Damages

In the 1980s, an economist named Stan Smith came up with a novel theory. He posited that basing damages in wrongful-death matters on earning capacity alone results in an incomplete picture of loss: Life is worth more than what a person would earn over his or her lifetime. He then claimed the ability to calculate scientifically the value of an individual life.

He first testified on the monetary value of a human life in Sherrod v. Berry, 827 F.2d 195 (7th Cir. 1987), a wrongful-death case. The jury awarded $850,000 in “hedonic” damages and an industry was born. Here is how Smith explains the rationale behind his value-of-life measurement:

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).

Economists have long studied willingness to pay for reduction of risk. To say that these studies reflect the actual value of life, however, mischaracterizes their intent. In fact, to link reduction-of-risk studies to the value of life flunks the basic-common-sense test. The studies examine the value of reduced risk, not life itself. What would you pay for a parachute before boarding an airplane? Then, what would you pay for a parachute if you were in a plane that has lost power and is spiraling toward earth, nose first? The risk-reduction studies look at the pre-flight sales of parachutes, not the sales made during the actual plane crash.

A Tenuous Connection

Perhaps because the connection between these so-called willingness-to-pay market studies and the actual value of a life is so tenuous, the hedonic economists began to cite more heavily to wage-risk studies. These studies correlate wages and risk in various industries. The theory is that workers will demand more pay for riskier jobs. However, these wage-risk studies have been emphatically shown to be unreliable.

In the Courts

Courts are realizing that the logical underpinnings of hedonic testimony were lacking. A good discussion the shortcomings of hedonics is found in Ayers v. Robinson, 887 F.Supp. 1049 (N.D. Ill. 1995). There are many more decisions finding fault with the theory.

The hedonics theory started in the wrongful-death arena but soon was applied to injury cases. In these cases, typically, a psychologist 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% of his or her enjoyment of life, the damages are $4 million.

Now, hedonic-damages testimony is being applied to matters where there is no physical injury at all. One recent example involves a lender-liability claim. The plaintiffs in this matter are a couple who had acquired, through a chain of mortgages, five residential properties. They defaulted and lost all the properties to foreclosure. Although this was a purely pecuniary claim involving absolutely no physical injury or pain, their claim against their lender included “lost value of life” damages. Their claims for the value of the properties, their loss of tax deductions and damages to “credit expectancy” amounted to less than $200,000. The wife's lost value of life, however, was put at $1.7 million to $2 million, and the husband's hedonic damages were valued at between $1.4 million and $2 million.

Another recent claim involved a couple who had lost their home, a trailer, in a fire. No one was hurt, but the loss of their trailer meant they had to commute an extra 26 miles to work. Their costs for the extra commute were put by the plaintiffs' economist at between $118,000 and $133,000 over the course of the plaintiffs' expected work lives. Their hedonic damages for the lost value of life, however, was put at between $710,000 and $1.2 million for the husband and between $768,000 and $1.3 million for the wife.

Purpose of the Claims

The claims for these types of claims are becoming more frequent; they are basically an attempt to move general damages ' i.e., damages for such unquantifiable loss such as pain, suffering and mental anguish ' to the special-damages side of the ledger. Special damages are those that are quantifiable, such as lost future income, medical expenses and the like. By characterizing pain and suffering as quantifiable “lost value of life,” the plaintiffs are attempting to make an end run around the monetary caps on pain-and-suffering awards enacted by legislatures in the name of tort reform.

While courts across the country have barred hedonic testimony, hedonic experts have, as we noted, shown remarkable resiliency. Stan Smith happily claims in his damages reports that hedonic testimony has been admitted “in approximately 175 state and federal jurisdictions nationwide in over half the states.” It is possible, however, that the hedonics train, at least as far as “lost quality of life” claims go, might soon be slowing down, if not stopped in its tracks.

'Adaptive Preference'

Economists are now studying the implications of a well-documented psychological tendency termed “adaptive preference,” whereby people quickly adjust to reduced physical or financial circumstances. People who are injured or who experience adversity adjust and bounce back to pre-injury levels of happiness, tending to become content with the way things are. In other words, their “lost quality of life” is not, in reality, lost. Hence, even if they exist, hedonic damages are not permanent.

A good discussion of the public-policy implications of adaptive preference and the disabled is found in “Hedonic Damages, Hedonic Adaptation, and Disability,” Bagenstos and Schlanger, Vanderbilt Law Review Vol. 60, No. 3, April 2007. The authors note that “courts have upheld hedonic damages awards based on the view that disability ' even in the form of relatively minor physical impairments ' necessarily limits the ability to enjoy life. That view, we contend, does not reflect how most people with disabilities themselves feel.” (at 760). The implications for testimony on hedonic damages is clear ' the testimony is not only not helpful but often is just plain wrong, at least where the disabled are concerned.

The broader implications of adaptive preferences on hedonic damages testimony are also clear ' the assumption that any tort results in “lost value of life” is questionable at best, and any testimony to the effect that hedonic loss is permanent is unreliable.

Chad L. Staller, J.D., M.B.A., M.A.C., a member of this newsletter's Board of Editors, is the president of the Center for Forensic Economic Studies. He can be reached at 800-966-6099, [email protected].

Like a zombie, expert testimony on the “value of life” (hedonic damages) refuses to die. Despite repeated stakes through the heart of hedonic damages testimony ' studies showing that the theory is unreliable, new evidence showing that the basis for such testimony in injury cases is nonexistent, and numerous successful motions-in-limine barring such testimony ' the economic hedonists are still with us. Amazingly, hedonic damages testimony is appearing in matters that at first, second or even third glance would seem totally inappropriate for testimony on life's value ' torts involving neither death, nor physical injury, nor even pain and suffering, but purely economic claims, such as lender-liability and employment matters.

Before outlining the inappropriate areas where hedonic damages testimony is now being applied, and before noting some new evidence that such testimony may be even more inappropriate than economists heretofore thought, some background may be helpful.

The Origins of the Theory

In the 1980s, an economist named Stan Smith came up with a novel theory. He posited that basing damages in wrongful-death matters on earning capacity alone results in an incomplete picture of loss: Life is worth more than what a person would earn over his or her lifetime. He then claimed the ability to calculate scientifically the value of an individual life.

He first testified on the monetary value of a human life in Sherrod v. Berry , 827 F.2d 195 (7th Cir. 1987), a wrongful-death case. The jury awarded $850,000 in “hedonic” damages and an industry was born. Here is how Smith explains the rationale behind his value-of-life measurement:

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).

Economists have long studied willingness to pay for reduction of risk. To say that these studies reflect the actual value of life, however, mischaracterizes their intent. In fact, to link reduction-of-risk studies to the value of life flunks the basic-common-sense test. The studies examine the value of reduced risk, not life itself. What would you pay for a parachute before boarding an airplane? Then, what would you pay for a parachute if you were in a plane that has lost power and is spiraling toward earth, nose first? The risk-reduction studies look at the pre-flight sales of parachutes, not the sales made during the actual plane crash.

A Tenuous Connection

Perhaps because the connection between these so-called willingness-to-pay market studies and the actual value of a life is so tenuous, the hedonic economists began to cite more heavily to wage-risk studies. These studies correlate wages and risk in various industries. The theory is that workers will demand more pay for riskier jobs. However, these wage-risk studies have been emphatically shown to be unreliable.

In the Courts

Courts are realizing that the logical underpinnings of hedonic testimony were lacking. A good discussion the shortcomings of hedonics is found in Ayers v. Robinson , 887 F.Supp. 1049 (N.D. Ill. 1995). There are many more decisions finding fault with the theory.

The hedonics theory started in the wrongful-death arena but soon was applied to injury cases. In these cases, typically, a psychologist 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% of his or her enjoyment of life, the damages are $4 million.

Now, hedonic-damages testimony is being applied to matters where there is no physical injury at all. One recent example involves a lender-liability claim. The plaintiffs in this matter are a couple who had acquired, through a chain of mortgages, five residential properties. They defaulted and lost all the properties to foreclosure. Although this was a purely pecuniary claim involving absolutely no physical injury or pain, their claim against their lender included “lost value of life” damages. Their claims for the value of the properties, their loss of tax deductions and damages to “credit expectancy” amounted to less than $200,000. The wife's lost value of life, however, was put at $1.7 million to $2 million, and the husband's hedonic damages were valued at between $1.4 million and $2 million.

Another recent claim involved a couple who had lost their home, a trailer, in a fire. No one was hurt, but the loss of their trailer meant they had to commute an extra 26 miles to work. Their costs for the extra commute were put by the plaintiffs' economist at between $118,000 and $133,000 over the course of the plaintiffs' expected work lives. Their hedonic damages for the lost value of life, however, was put at between $710,000 and $1.2 million for the husband and between $768,000 and $1.3 million for the wife.

Purpose of the Claims

The claims for these types of claims are becoming more frequent; they are basically an attempt to move general damages ' i.e., damages for such unquantifiable loss such as pain, suffering and mental anguish ' to the special-damages side of the ledger. Special damages are those that are quantifiable, such as lost future income, medical expenses and the like. By characterizing pain and suffering as quantifiable “lost value of life,” the plaintiffs are attempting to make an end run around the monetary caps on pain-and-suffering awards enacted by legislatures in the name of tort reform.

While courts across the country have barred hedonic testimony, hedonic experts have, as we noted, shown remarkable resiliency. Stan Smith happily claims in his damages reports that hedonic testimony has been admitted “in approximately 175 state and federal jurisdictions nationwide in over half the states.” It is possible, however, that the hedonics train, at least as far as “lost quality of life” claims go, might soon be slowing down, if not stopped in its tracks.

'Adaptive Preference'

Economists are now studying the implications of a well-documented psychological tendency termed “adaptive preference,” whereby people quickly adjust to reduced physical or financial circumstances. People who are injured or who experience adversity adjust and bounce back to pre-injury levels of happiness, tending to become content with the way things are. In other words, their “lost quality of life” is not, in reality, lost. Hence, even if they exist, hedonic damages are not permanent.

A good discussion of the public-policy implications of adaptive preference and the disabled is found in “Hedonic Damages, Hedonic Adaptation, and Disability,” Bagenstos and Schlanger, Vanderbilt Law Review Vol. 60, No. 3, April 2007. The authors note that “courts have upheld hedonic damages awards based on the view that disability ' even in the form of relatively minor physical impairments ' necessarily limits the ability to enjoy life. That view, we contend, does not reflect how most people with disabilities themselves feel.” (at 760). The implications for testimony on hedonic damages is clear ' the testimony is not only not helpful but often is just plain wrong, at least where the disabled are concerned.

The broader implications of adaptive preferences on hedonic damages testimony are also clear ' the assumption that any tort results in “lost value of life” is questionable at best, and any testimony to the effect that hedonic loss is permanent is unreliable.

Chad L. Staller, J.D., M.B.A., M.A.C., a member of this newsletter's Board of Editors, is the president of the Center for Forensic Economic Studies. He can be reached at 800-966-6099, [email protected].