| Risk is often
understood as the possibility of loss. But risk,
in financial terms, is really a way to talk about
a range of possibilities -- the variability of returns.
In short, risk is a way to describe degrees
of uncertainty. For example, it is said that
a one-year government note that will pay 4.5% interest
has no risk, because the bondholder is certain of
payment in one year. (Of course, the government
might default, but financial economists generally
don't even want to think of that.) But
a company's common stock has risk because there
is no assurance that it will earn dividends -- the
company might not have earnings, or the board could
postpone declaring dividends, or the company could
go bankrupt. On the other hand, the company might
pay handsome dividends -- that also is a possibility!
Next we pause to consider the fundamental nature
of risk and its pervasive role in our decisionmaking
process—both in general and legal contexts.
This sets the stage for the remainder of this
chpater when we look much more closely at the
components of risk, their relation to each other,
and how they can be applied to make decisions
about future value.
In addition, risk should be understood as having
multiple dimensions. Too often we think of risk
in isolation. Instead it is often more realistic
to see risk as it affects multiple, related outcomes.
For example, rain is a risk to a farmer -- with
mixed effects. Rain increases the chances his
crops will grow, it makes the air smell fresh,
and it causes his tractor to get stuck in the
mud.
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Example
Everyday economics. How the dismal
science applies to your life.
Is Your Life Worth $10 Million?
Nope. But your grandson's will be. By Steven
E. Landsburg Posted Slate.com
Monday, March 3, 2003, at 6:22 AM PT
While touring the magnificent
old Dupont estate, I overheard an awestruck
gardener mutter, "You can see why these
people would have hated to die worse than anybody."
I know what he meant. Life is dear, but life
is dearer when you're rich.
You're richer than your grandparents,
so your life is worth more than theirs. That's
why you live in a safer world than they did:
As life gets more valuable, we strive harder
to protect it.
What does it mean to say that
one life is "worth more" than another?
Aren't all lives infinitely precious? Well,
no, at least not in any sense that's at all
useful for making hard policy decisions about
things like job safety and access to medical
care. (More>>)
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| "The Value of a Statistical
Life: A Critical Review of Market Estimates throughout
the World"
BY: W. KIP VISCUSI
Harvard Law School
National Bureau of Economic Research (NBER)
JOSEPH E. ALDY
Harvard University
Department of Economics
Document: Available from the SSRN Electronic
Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=379270
Paper ID: NBER Working Paper No. W9487
Date: February 2003
Paper Requests:
Full-Text downloads are available from SSRN Online
for $5.
ABSTRACT:
A substantial literature over the past thirty
years has
evaluated tradeoffs between money and fatality
risks. These values in turn serve as estimates
of the value of a statistical life. This article
reviews more than 60 studies of mortality risk
premiums from ten countries and approximately
40 studies that present estimates of injury risk
premiums. This critical review examines a variety
of econometric issues, the role of unionization
in risk premiums, and the effects of age on the
value of a statistical life. Our meta-analysis
indicates an
income elasticity of the value of a statistical
life from about 0.5 to 0.6. The paper also presents
a detailed discussion of policy applications of
these value of a statistical life estimates and
related issues, including risk-risk analysis.
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2.1.1 Returns