"Business activities such as chemicals, flying and pharmaceuticals are heavily regulated. Agencies such as CSB must balance the conflicting public interests in greater safety and cheaper products. Some do so explicitly: their economists try to calculate the monetary value of life, serious accidents and environmental damage. Perhaps companies should make the same assessment?
The Ford Motor Company once did. The company’s calculation was the “smoking gun” in what may be the most famous trial in the history of product liability. Richard Grimshaw, a 13-year-old passenger, suffered horrible disfigurement when a Ford Pinto caught fire after a rear-end collision. A Californian jury awarded $125m in punitive damages, but this was reduced on appeal.
Legend has Ford executives marketing a dangerous car after estimating that it would be cheaper to settle with grieving widows than to spend $10 per car protecting the fuel tank. The facts are somewhat different. The offending memo was prepared as part of a submission to the company’s safety regulator, the National Highway Transportation Safety Agency. The memo did not estimate the costs to Ford of protecting the fuel tank from the accident that injured Mr Grimshaw, but the cost to the US car industry of reducing the risk of fuel leakage if a car rolled over. The value of life in the calculation, at $200,000, is offensively low: much less than a US jury typically awards, and much less than the jury did in fact award to the family of the driver of the Pinto, who was killed in the accident. But the figure is based on a common methodology used by public agencies in such assessments and its source was the NHTSA itself. Ford’s calculation was precisely the one it believed the agency would make.
The Pinto was not a safe car. Small cars on US roads are vulnerable. The Pinto’s safety record was neither better nor worse than that of other small cars on American roads at the time.
Making decisions that balance human life against costs is unavoidable. Doctors and politicians, generals and road engineers must do so all the time. Everyone who buys a compact car makes such a trade-off. We wish it were not so. We prefer that the calculations are implicit rather than explicit. We prefer them to be made by public agencies than by private companies. And we deny that we make these judgments ourselves, although we do so every day.
Ford’s error in that memorandum was a more subtle one than the story of profit before human life – which may, nevertheless, have been the reality – allows. A private business had asserted the authority which only a political process can make legitimate. The safest course for a company making judgments about public safety – and it is not a very safe course either for the company or the public – is to rise slightly above the standards of its peers."
Related;
Regulation of Health, Safety, and Environmental Risks by W. Kip Viscusi
Smoke and Mirrors: Understanding the New Scheme for Cigarette Regulation
by W. Kip Viscusi
The Perception and Valuation of the Risks of Climate Change: A Rational and Behavioral Blend by W. Kip Viscusi
Risk-Risk Analysis
For overview of economics of the issue see Trade-Offs: An Introduction to Economic Reasoning and Social Issues by Harold Winter
(reviews at Newmark's Door and EclectEcon)
Reckless Homicide? Ford's Pinto Trial by Lee Patrick Strobel
The Myth of the Ford Pinto Case
THE FORD PINTO CASE
1 comment:
In writing about regulation John Kay poses a question
"...
Perhaps companies should make the same assessment?
..."
But the question itself makes one critical assumption: That an executive or group of executives are capable of making a value based judgement.
Whether they can or not is based largely on the formative social, educational and professional environments they have been exposed to prior to the decision event.
I prefer to group this environmental exposure together into symptomatic knowledge elements; education, intuition and experience or "EIE loop".
If you use these three elements of knowledge together, you can then form "Implicit Knowledge" that Dietrich Dorner sometimes refers to.
Following this logic, then Ford's executive EIE loop failed in gaining Implicit Knowledge. To be specific they failed to gain implicit understanding of the situation and (as a result) used the wrong units in their calculus. They chose USD to measure life and life (by current Western definition) cannot be measured in USD.
In other words life has a qualitative value that cannot be expressed in the quantitative units that one uses to measure corporate performance.
Love for example; is a better unit to use in the calculus because it is feasible that both parties could experience this emotion with regard to their situational environment e.g. "Does the executive of a company love that company just as much as a mother loves her child?"
Another unit might be "social worth", but the point is, do not pick the wrong units in your calculus, as no matter how attractive your answer is, it will be wrong.
A modern example of someone who may have exercised Implicit Knowledge is Michael Burry.
So I would modify Jon Kay's conclusion in expressing it this way: The safest course for a company making judgments about public safety is to exercise Implicit Knowledge.
BstRgds
Deane
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