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January|February 2004
The Trials of John Edwards By David Greenberg
Deep Impact By Daphne Eviatar
What's Your Happiness Worth? By Brendan I. Koerner

What's Your Happiness Worth?

$3.2 million, says one influential economist.

By Brendan I. Koerner

J. C. JOHNSON NEVER HAD A CHANCE. Turning off Mississippi's Highway 80 onto a steeply ascending rural road, he had no inkling of the freight train that was approaching the crossing ahead. There were no safety gates or flashing lights, and unpruned trees obscured the view. The engineer on the locomotive's right-hand side didn't see Johnson's truck until the crossing was less than 150 feet away—a distance the train would cover in less than three seconds. A full brake was impossible.

Johnson escaped the July 1995 collision with his life, but his wounds were horrific: a cracked pelvis, bruised lungs, gnarled hands, and extensive brain injuries. Given the lack of safety measures at the crossing, a lawsuit against the train's owner, Kansas City Southern Railway, was inevitable. With his mental capacity reduced to that of a child, Johnson could no longer work, and his medical expenses were huge—standard reasons for seeking compensation in a tort suit.

But Johnson and his family felt entitled to something more. Not only could he no longer earn a salary; he couldn't even participate in the activities that had brought him the most joy—hunting, fishing, and tending to his yard. Nor could he banter and josh with his family. "I watched an articulate man who took pride in his vocabulary struggle to get one word out," Johnson's daughter, Angela, testified at trial. "And I have watched a person that was always happy look sullen and sad, stare out into space."

The accident had clearly stripped Johnson of substantial happiness, and he demanded compensation for that loss—"hedonic damages," in legal parlance. Other noneconomic tort awards, like money doled out for emotional distress, are arbitrary, based on little more than the jury's intuition and the size of past sums. There's no such thing as an expert witness on pain and suffering, since it's acknowledged that there's no way to calculate something so subjective. Hedonic damages, by contrast, are ostensibly rooted in science, based on a statistical formula that purports to translate a lifetime of joie de vivre into cold cash. That means the plaintiff can put an expert witness on the stand to explain the principles of hedonic damages and moisten a few jurors' eyes. Such testimony is often ruled inadmissible because of doubts that forensic economists can compute joy. But when the testimony works, it can inspire jurors to dole out millions.

In need of an expert, Johnson's attorneys turned to Stan Smith, the 56-year-old Chicago-based economist who coined the term hedonic damages. Twenty years ago, called to testify in the federal wrongful death case of Sherrod v. Berry, he devised a methodology for measuring a human life. The Seventh Circuit Court of Appeals singled out Smith's formula as "invaluable to the jury." Ever since, he's made a career of crisscrossing the country at the behest of plaintiffs, explaining to juries that happiness has a monetary value: roughly $3.2 million for the average American, by his calculation.

AT THE HEART OF SMITH'S FORMULA is a concept called "willingness to pay," or WTP. This can be broken down into two subsets, the "wage-risk model" and the "consumer expenditure approach." The former analyzes how much additional salary people demand to assume additional risk. Suppose you're a security guard and your boss wants to transfer you to a downtown warehouse where the crime rates are higher. In the new neighborhood, your odds of being killed in the line of duty will double from 1 per 2,000 to 1 per 1,000. Aware of this danger, you ask for a pay raise of $3,000 a year. So, according to Smith's calculations, you've just valued your life at $3,000,000—$3,000 multiplied by 1,000. Not that Smith tailors his formula to the particulars of an individual's life; rather, he examines decisions in numerous professions and comes up with a range of averages.

The consumer expenditure approach looks at how much people are willing to spend on safety products to reduce their risk of death. Let's say you've splashed out $1,000 for a snazzy burglar alarm, which has lessened your risk of being shot by a robber by 0.02 percent; then, you've valued your life at $5,000,000.

A lot of forensic economists frown on Smith's extrapolation of WTP averages into monetary measurements of delight. A police officer may put his life at risk for a low financial incentive, but that doesn't mean he is necessarily unhappy. He might enjoy the risk and the adventure of the job. And what about all those millionaires cooped up in fortified McMansions, stressing over their 80-hour-week jobs and popping antidepressants—doesn't Smith's formula imply that they're happier than middle-class moms who don't have security cameras? WTP "calculates the value of reducing the risk of a fatal accident," said Richard Stout, an economics professor at Knox College in Galesburg, Ill. "To go from that to saying, 'Oh, that's the value of a life'? No way—it doesn't follow."

Another common gripe is that Smith is overselling the power of economic analysis. A growing number of economists are interested in integrating psychology into their models; a share of the 2002 Nobel Prize in economics went to Daniel Kahneman, a Princeton University psychologist who has developed new metrics for well-being. But few economists believe that such research can be used to quantify life's pleasures in dollar terms. "Economists generally limit themselves to the types of assets that are priced in commercial markets," explained Thomas R. Ireland, an economics professor at the University of Missouri-St. Louis. "There's nowhere you can go to buy some happiness. I mean, you can't pay $1,000 and be happy for the next year."

Smith counters that the WTP's self-valuations must correlate, albeit loosely, with human happiness, since a person who loves life will prize his continued existence more highly than a miserable soul. Smith admits it's not a perfect methodology, given the complexity of the human psyche. "What would be difficult is to definitively determine whether one person is enjoying life more than another," he said. "I can't tell you that a famous canvas painter enjoys life more than an outdoor sign painter, or a musician enjoys life more than a kindergarten school teacher . . . . But we can get a value for how much the average person enjoys life."

The jury in the Johnson case seemed swayed by that logic. It awarded $3.5 million to Johnson and his wife, far more than they would have recovered had they pressed only for economic damages of lost wages and medical costs. How the jury arrived at that multimillion-dollar figure is a mystery to Smith, as he did not suggest an exact sum—and never does. "I orient them to the concept and give them the statistical values, then leave the final tailoring up to them," he said.

The vagueness of such expert testimony may be its strength. Even if jurors are confused by the concept of happiness, or don't buy it entirely, having an economist on the stand to talk about it can plant an important seed in their minds. At the very least, it gives the plaintiff's attorney a convenient heartstring to tug at during closing arguments. "The minute you characterize it as money for not being able to have sex, people perk up," said Abraham Rudy, a civil litigator with the Beverly Hills firm of Weissmann Wolff. "When juries buy it, they buy it big."

KANSAS CITY SOUTHERN RAILWAY, like many other defendants facing hedonic damages claims, unsuccessfully tried to exclude Smith's expert testimony on the grounds that it was "junk science." More often than not, that strategy seems to work: A 1997 survey coauthored by Ireland found that hedonic testimony was excluded in 13 out of the 15 cases examined. Such testimony usually flunks the Daubert test, which requires scientific evidence to be derived from reliable methods in order to be admissible.

Mississippi uses the older Frye test, which requires only that testimony be generally accepted in the relevant field. And it's getting easier for trial lawyers to demonstrate that hedonic testimony meets that criterion. Nearly 20 years after Smith began his career as an expert witness, his formula is widely used. And he's quite proud that the bill authorizing compensation to 9/11 victims mentions hedonic damages. It allows the special master in charge of determining the payouts to factor lost happiness into his equations.

In February 2001, the Mississippi Supreme Court affirmed the trial court's decision to allow Smith's testimony in the Johnson case, to the chagrin of the state's insurance industry. Insurers were even more perturbed the following May, when the court went a step further in Choctaw Maid Farms, Inc. v. Elizabeth F. Hailey. In Choctaw, the estate of a 23-year-old accident victim sought hedonic damages for the happiness the young man would never have. Smith testified at the trial, and the jury included $1,902,318 in hedonic damages in their verdict. The state's supreme court ruled 6-3 that hedonic damages were, indeed, recoverable, even though the slain man, unlike J. C. Johnson, could not know what he was missing.

The Mississippi court became just the fifth state supreme court after New Mexico, New Hampshire, Connecticut, and Hawaii to affirm the recovery of hedonic damages in wrongful death cases. (Under Sherrod v. Berry, a case involving police brutality in Illinois, the federal system permits hedonic damages when a death occurs as part of a civil rights violation.) Smith thinks that granting hedonic damages is only fair. "We send our children to Sunday school and teach them that life is a gift from God, and it's our most precious asset," he said. "Then we have to tell them that in 45 out of 50 states, it's given an asset value of zero?"

The greatest barrier to the more widespread pursuit of hedonic damages remains the imprecision of Smith's methodology. But other economists are pushing the science of joy measurement beyond WTP. In 2002, a pair of economists at Warwick University in England published a paper entitled "A Simple Statistical Method for Measuring How Life Events Affect Happiness." Relying on approximately 1 million self-assessment reports from 20 nations, Andrew Clark and Andrew Oswald calculated exactly how much specific events, like getting married or falling gravely ill, affected happiness. They concluded, for example, that losing a spouse deprived a person of $250,000 worth of annual bliss, while being laid off or fired caused psychological damage equivalent to $415,000 per annum.

The Warwick researchers believe that their "macroeconomics of happiness" could assist juries in determining hedonic awards. But their formula won't be mentioned in any Mississippi courtrooms. On the heels of the Johnson and Choctaw decisions, there was a public uproar over the state's "jackpot justice reputation," as the president of the Mississippi Manufacturers Association called it in the Jackson Clarion-Ledger. In a special session in November 2002, the Mississippi state legislature passed a sweeping tort reform bill that forbids any expert testimony on hedonic damages and prohibits such awards in wrongful death cases. Mississippi thus became the first state successfully to outlaw hedonic testimony. The state's juries need no longer concern themselves with human happiness.

Brendan I. Koerner, a fellow at the New America Foundation, last wrote for Legal Affairs about Global Positioning System technology.

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