What Value WellBeing? ... An interview with Daniel Fujiwara by Rupert Widdicombe.
A new way of valuing human intangibles based on wellbeing is gaining currency, as valuation expert Daniel Fujiwara explains.
Economists are fascinated by the choices we make and their value to us. Our ‘revealed preferences’ have long been their data of choice.
All too often no direct market data are available. If you are evaluating plans to build a railway through countryside how do you put a value to the impact on the people who live there? To get round the lack of data, economists may commission ‘stated preference’ surveys asking people to put a value on a particular outcome. How much would you be willing to pay to protect an endangered species? However economists and decision-makers have reservations about the value of much self-reported data is why about using them.
A new approach to valuation is becoming increasingly popular with policy makers. Since 2011 it has been included in the Green Book, the UK Treasury’s guide to evaluating public projects. It is called wellbeing valuation and, to find out more, I spoke to one of the pioneers of this approach in the UK: Daniel Fujiwara of the London School of Economics, formerly senior economist on cost-benefit analysis in the Cabinet Office and the Department for Work and Pensions.
How does wellbeing valuation use survey data to derive values?
DF: Wellbeing valuation takes data on people’s subjective wellbeing (SWB) from large surveys and uses statistical or econometric techniques to assess how different life events impact on SWB. The British Household Panel Survey (BHPS) is a popular dataset. It surveys over 10,000 people year-on-year asking them about 500 questions on different aspects of their lives, including questions about wellbeing and happiness. And many more UK datasets now also include questions on SWB.
In cost-benefit analysis and related techniques such as social return on investment (SROI), the value of something is the amount of money required to produce the equivalent impact on a person’s welfare or wellbeing.
Data like the BHPS can be used to estimate the impact that a non-market good or outcome has on SWB, such as improved life satisfaction. We can also use the BHPS to look at the impact that extra income has on SWB. And using these two estimates, we can then calculate the equivalent value of the non-market good.
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For example, if we want to estimate the monetary costs associated with non-market outcomes from the creation of a new train line, we could do this in wellbeing valuation by looking at the impacts that train lines have on SWB. For example, it may be that people living close to train lines have one index point lower life satisfaction all else equal. Through the wellbeing valuation method we would then seek to find out how much extra income would also generate an equivalent one index point change in life satisfaction. If it turned out that £2,000 increases life satisfaction by one index point, then we could conclude that the monetary costs associated with the dis-benefits from train lines is equivalent to £2,000 per person per year.
Wellbeing valuation can be used to value both benefits, such as reductions in crime levels, and dis-benefits, such as pollution. The richness of the data and the huge range of variables tracked means it is possible to attach meaningful values to a wide range of non-market outcomes. The method has been used before to value many things from droughts and political corruption, to air quality and good health.
This approach is useful for decision-making because it allows us to understand how much people value outcomes associated with different policies and interventions, allowing us to channel resources to areas that create most value for society.
In general, economists have reservations about ‘stated preferences’, so why do they find self-reported wellbeing data more convincing?
DF: The ‘stated preferences’ gathered through surveys can be surprising and arbitrary – people find it hard to put a value on feelings and goods and outcomes that are not traditionally traded in markets. We tend to find lots of biases in stated preference methods. For example, some people may intentionally state a very high value to encourage government to provide the non-market good or service or they may reverse or flip their choices all of a sudden.
We don’t get these biases with wellbeing data, as we don’t ask people the difficult question of how much they value a non-market outcome. Wellbeing data are also self-reported, but there is a good amount of evidence to suggest that SWB responses provide useful information about a person’s actual wellbeing and how life is going for them. For example, wellbeing and life satisfaction scores correlate with other important factors that we would expect to be important for a person’s wellbeing such as health, suicide rates and smiling and frowning. There’s even evidence from fMRI scans to show that life satisfaction correlates well with activity in areas of the brain associated with pleasure and enjoyment.
The great thing about using wellbeing data in wellbeing valuation is that we can assess the impact of outcomes and policies on how people experience their lives, rather than assessing impact based on what people predict and say they will like. Very often we find that people state high values for non-market goods in surveys but in the experience of their lives we find that those goods have very little actual impact on their wellbeing. In these instances wellbeing valuation provides a more accurate description of the value people place on things.
A monetary value is being put on subjective wellbeing – is this an appropriate comparison to make?
DF: I get asked this question a lot. The important thing to note is that we are ultimately interested in understanding the impact of non-market goods on people’s welfare or wellbeing. It just so happens that we tend to do this using money metrics in economics, but in theory we could measure value in terms of pretty much anything. Money is a useful metric to use because it allows us to compare the value of outcomes directly with the costs of the programme, which are usually set in financial terms. Thus we don’t really ‘put a value’ on wellbeing, we are simply finding the amount of money that would produce the equivalent impact on a person’s wellbeing. It’s a bit like saying this car is travelling at 97kph rather than 60mph – it’s the same thing or phenomenon measured in different units.
How is wellbeing valuation being used today to inform decisions?
DF: Wellbeing valuation is increasingly being used as a complement or even as an alternative to other valuation methods in the UK. The Green Book suggests the approach ‘can play an important role in challenging decision makers to think more carefully about the full range of impacts of their proposed policies’ and ’question the values that they may otherwise place implicitly on these impacts’. There is also growing interest from the OECD [Organisation for Economic Co-operation and Development].
A practical advantage of wellbeing valuation is that it is a very cost-effective alternative because the data required to run the analysis are usually already available in large national datasets. Stated preference surveys can be a lot more expensive because they entail running surveys and data collection before any analysis can take place. The approach has been used by government departments including the Department for Business Innovation and Skills (the value of adult learning), the Department for Culture Media and Sport (the value of participation in culture and sport) and the Department for Communities and Local Government (the value of urban regeneration)). A large number of charities are also using the wellbeing valuation method to inform SROI and decision-making.
Daniel Fujiwara is a consultant in economics and econometric analysis and a researcher at the London School of Economics and Political Science (LSE), where he is finalising his PhD on policy evaluation methodology. He also holds a number of advisory roles, including Scientific Advisor to the SROI Network. His research focuses on the normative foundations of cost-benefit analysis, policy evaluation methodology and valuation techniques for non-market goods. He has a strong interest in the use of subjective wellbeing data in policy-making and valuation and has advised numerous governments and international organisations on policy evaluation. Prior to joining the LSE, Daniel was senior economist at the Cabinet Office and worked for 10 years in policy evaluation in the UK Government, where he was awarded the John Hoy Memorial Prize in Economics for his contribution to policy evaluation methodology. He is the author of the Treasury Green Book guidance on valuation techniques.
Rupert Widdicombe is a writer, editor and communications consultant. His articles have been published in The Guardian, Sunday Times, The Economist and other UK and international titles. He has worked as script writer and editor, a communications specialist supporting public sector reform, and a resource for development organisations in Latin American and Africa. He can be contacted at firstname.lastname@example.org