Volume 1

Government policy on the management of risk / House of Lords, Select Committee on Economic Affaris.

  • Great Britain. Parliament. House of Lords. Select Committee on Economic Affairs.
Date:
2006
Catalogue details

Licence: Open Government Licence

Credit: Government policy on the management of risk / House of Lords, Select Committee on Economic Affaris. Source: Wellcome Collection.

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    based “Value of Preventing a statistical Fatality” (VPF). Thus if, on average, the members of this population were willing to pay £15 to reduce their risks of death to this extent, the VPF would in this case be £1.5m. Exactly the same approach can be used to derive Values for Preventing non-fatal Injuries (VPIs). It should be stressed that, as defined above, the VPF is not a “value (or price) of life” in the sense of a sum that any given individual would accept in compensation for the certainty of his or her own death. For most people no sum, however large, would suffice for this purpose, so that in this sense life is literally priceless. Rather, the VPF represents an aggregate willingness-to-pay for typically very small reductions in individual risk of death (which, realistically, is what most safety improvements actually offer at the individual level). This reflects people’s normal approach to risks which they face in everyday life, where they trade off cost or convenience against real, but very small, risks. The Treasury Green Book emphasises the fact that: “The willingness of an individual to pay for small changes in their own or their household’s risk of loss of life or injury can be used to infer the value of a prevented fatality (VPF). The changes in the probabilities of premature death or of serious injury used in such WTP studies are generally very small””’. By its very nature, it is perhaps hardly surprising that the willingness-to-pay approach to the valuation of safety is not without its critics. Thus, in addition to those who have quite reasonably questioned the robustness of the empirical procedures employed to estimate individual willingness-to-pay— including some very eminent cognitive psychologists—criticism has also been aimed at the philosophical and ethical foundations of the approach. In his evidence to us, Professor John Broome argued that the underlying theoretical basis of the willingness-to-pay approach to the valuation of safety suffers from two fundamental flaws relating to the violation of expected utility theory and the apparent priority given to the safety of the wealthy. Thus: “Understood as part of a theory of value, expected utility theory is very well grounded. We should reject any method of valuation that is inconsistent with it. However, willingness-to-pay, the dominant method in economics, is indeed inconsistent with it. ...according to the willingness-to-pay method, the value of reducing a person’s risk varies [increases] with the level of risk she bears. But expected utility is a linear function of probability, so according to expected utility theory, the value of reducing a person’s risk is constant: it does not vary in this way”; and “...the default view that is implicit in willingness-to-pay is that money has the same value to everybody—£1 to one person has the same value as £1 to somebody else—which in effect overvalues the money to a rich person and hence the life of a rich person. My proposal is that...we should think that a year of life has the same value to one person as it does to anybody else””’. In response to such criticisms, advocates of the willingness-to-pay approach would no doubt cite two pieces of evidence. First, the theoretical foundation