How much is a life worth?
Before I dig deeper into this seemingly provocative subject, I want to quickly recap on the previous article I wrote. It seems at this point, Italy's daily new cases have been stabilized and trending downward.
Market volatility has come down quite dramatically. And irrational fear seems to be gone with the rising price of gold and government bonds. Most western countries have already implemented fiscal policies at an unprecedented scale to save the economy. The direction is certainly optimistic. However, I still believe that the economic impact is underestimated by the market. I maintain my view stated in the previous article that we will only get the full picture in Q2, Q3 earning season and then have a better idea on the road to recovery. That means, we still have time to do our homework and hopefully, take full advantage of the current situation and come out as winners.
As mentioned in my previous article, I want to start a series of articles on investment. I tried to start with a couple of fundamental concepts such as value vs price, cashflow vs profit... But none of them seems to be quite fitting. The reason is that economic and financial concepts are based on rational thinking. As human beings, 90% of our decisions are made instinctively by design. And more often than not, even a decision that we may think is rational can turn out to be the exact opposite. Our brain is conditioned with confirmation bias, filled with a spectrum of emotions such as fear, greed, compassion, moral righteousness, that hinders our ability to make any purely logical decision. Therefore, in order to make a proper analysis of anything, we need to first be able to differentiate and separate the rational from the irrational and the data from the noise.
So, how much is a life really worth? Priceless is perhaps the most common answer you will get. Some would even argue that this is an absolute principle. And from the surface, it makes a lot of "sense". However, it is not hard to debunk this morally righteous answer using simple logic. A simple comparison between the life of a cancer patient and a newborn child is sufficient to indicate that life has relative value. If we agree that the value of life is relative, we can then evaluate its value by measuring it against a certain standard.
For the purpose of this exercise, let's use money as the standard for measurement. In fact, money is a unit of measure that holds no intrinsic value. It's the same as meter or foot. We use dollars, pounds, euros to facilitate exchange thus measure economic input and output. So when we say an iPhone is $1000 and a happy meal is $10, we really mean that the economic output of the actions to produce an iPhone is roughly 100 times of a happy meal. Therefore, when we are measuring the value of life with money, we are really measuring the value of life with the economic output of our actions.
Let's start by estimating how much we value our own lives. Let's assume that we take the car to go to work and earn $100/day. Statistically, there is a 5/100,000 chance of dying in a car accident. Quick math gives us an estimate that our action dictates that we value our life less than $2M (Value Life = Return of the action/Probability(Death)). Yet, if we ask most people today, how much money would it take to kill themselves? The number is probably closer to $2 billion. If we value ourselves more than $2M, the rational decision would be either make more money or take a safer method of transportation.
What about others' lives? The real answer is sadly close to $0. No matter how much we'd like to think we value other people's lives, our daily action indicates that we really don't. An extreme example is sponsoring a child in Africa. We can currently sponsor a child in Africa for $1/day yet we don't. For most of us, our actions indicate that the value of their lives is not worth more than a cup of coffee.
What about the lives of people who are closer, such as our fellow citizens? Well, let's use our contribution to healthcare to do a quick estimation. Collectively, we pay roughly 50% of our income to taxes, half of which is spent on healthcare. Let's assume that the average salary is 50K/person, then 12.5K goes to our healthcare system. Canada's current active population is roughly 20M so that gives us about $250B spent on healthcare. ($242B is the official number in 2017). Let's assume that 10% of this cost is spent on life-saving medical treatments and that we are able to save 20% of the dying patients. In 2018, there is roughly 300K death in Canada. Therefore, according to these assumptions, we spend $25B/year to save roughly 60K people. So collectively, we value the life of our fellow citizens at roughly 400K. Luckily, we live in a country where we don't have to compute these numbers on an individual level when it comes to saving lives. However, making choices between a child's education and an elder's life-saving treatment is, unfortunately, an economic calculation that most of the world has to make.
Of course, these numbers are based on oversimplified assumptions and can vary greatly depending on many other parameters. And my actuary friends probably have those numbers down to the dollar. However, this simple exercise does show that our individual and collective decisions and actions dictate that not only are lives not priceless, they are worth much less than we would like to think. It also shows that:
Our ideals and our actions are more often than not, inconsistent
Our daily decisions can be very irrational
Our evaluation and the collective evaluation can also differ quite significantly
And if we extrapolate this rational thinking to a larger scale, it can also give us a different perspective when it comes to COVID-19. Is the current quarantine worth it? How many lives do we need to save vs how many months of shut down is it rational? It is not a question of principle like most people would suggest as we can all agree that if the death toll is 100, no one would even bother mentioning the decease. And if that number is 10 million, we probably should have much more strict confinement rules.
This is why this seemingly unrelated subject is so interesting and compelling to me that I've decided to use it to start my series of articles on investment. If we are able to rationally evaluate peoples' lives including our own by separating our emotions, our pre-existing beliefs, our "principles" and our biases, then we should be able to do this with a lot more ease when it comes to investments.
For instance, if we agree that the fundamental value of an asset class is only a function of its future cashflow. Then the initial investment value has absolutely no logical effect on its future value. However, naturally, we base our decisions on sunk costs. How much we pay for an asset almost always affect how we make the decision to sell.
Finally, I would like to emphasize that the goal of this article is not about what we should or should not do. It is not about what is right and what is wrong. In fact, I constantly make irrational decisions by drinking, smoking and owning a dog. It is what makes our life colourful and "meaningful". But we must recognize our flaws as human beings when it comes to rational thinking so that we can tell the difference, especially when it comes to our financial decisions. At the end of the day, knowing and accepting the instinctive animal side of us is also what makes us more human.