On Balance: So You want to Conduct a Benefit-Cost Analysis? Experts Share Their Stories

This blog series is a partnership of the Society for Benefit-Cost Analysis On Balance blog and Dr. Zoë Plakias’ Spring 2021 Benefit-Cost Analysis (AEDECON 5330) class at The Ohio State University. Students interviewed experts in benefit-cost analysis to learn about what they do and why they do it. All interviews have been edited for brevity and clarity with the help of Dr. Plakias and are shared with the approval of the interviewer and interviewee.

  • Expert: Dr. James Hammitt
  • Interviewer: Loryssa Lake

Dr. James Hammitt is a Professor of Economics and Decision Sciences at Harvard University. He is also the director for the Harvard Center for Risk Analysis and has affiliations with the Harvard University Center for the Environment, Harvard School of Public Health, Harvard Center for Risk Analysis, Harvard Environmental Economics Program, the Harvard China Project, and a joint appointment at the Toulouse School of Economics

Q: I know you started in applied mathematics. Is that something that you knew you wanted to get into or did you find out about environmental economics as you were studying?

A: Oh, I found out later. When I went to college, like many people, I didn't really know what I wanted to do and what I wanted to major in. I discovered applied math, which seemed really good for me because I liked math and was pretty good at it and I had the sense math was useful for many things. So, I went into that and I didn't take any economics until I was a sophomore at least and sort of fell into that as the place I wanted to apply math.


Q: And what in particular interested you about economics?

A: Well, really I kind of backed into it through decision analysis. I discovered a book by Howard Raiffa called Decision Analysis. And I was really excited when I found that because it was essentially a way to think about making decisions when the consequences are uncertain, which they always are, in a logical, coherent, methodical way.


Q: Do you feel like that background has found its way into a lot of the research that you're doing now?

A: Absolutely, that’s my primary field. I got into the environment because, well, I grew up in Los Angeles, and always did a lot of outdoor stuff in the water and hiking. And when I was a kid that's when we had the first Earth Day, and we had the Santa Barbara oil spill, and the environmental movement was becoming strong in that period. And of course, LA had terrible air pollution, so that was a big topic. So, it's a combination of decision analysis and my interest in the environment.


Q: I know that you characterize preferences in regard to health and environmental risk using three different methods: revealed preference, stated preference, and the health utility method. Do you find that there's one method that’s best for estimating these preferences, or do you have to kind of combine them all together?

A: Well, part of the problem is, we don't know what best means. From an economic perspective, we start with the idea of individual autonomy. So, individuals are assumed to have preferences that are reasonable and as a default you want to assume people know what's best for them, unless you have a strong reason for thinking otherwise. But obviously there's lots of evidence that all of us make dumb decisions and we make some judgments because we're not thinking straight. For many things we just don't have enough information. Take environmental health risk; it's very complicated and even the experts don't know everything about it. So, there’s a sort of tension. Revealed preferences and stated preferences are different ways of inferring what people’s preferences are. Economists have tended to be skeptical of survey results [stated preference methods] because what's the cost of giving a dumb answer to a survey? Essentially none. Whereas when you're actually behaving with real consequences, you have an interest in figuring out what's the best thing for you to do. But there are lots and lots of areas where you can only ask questions, you can’t observe people making these choices because the choices don't exist. There's tension there. With the health utility assessment I'm thinking of things called quality adjusted life years and disability adjusted life years. Those are concepts that put a lot more structure on what people's preferences need to be to be consistent with that framework. And they’re oversimplifications. People's preferences are not exactly consistent with those concepts and there's no reason that they should be consistent. But by enforcing some structure, you rule out some crazy preferences people might seem to have. And the deep question is whether they really have these preferences that seem outside the model or not. And that’s where we don’t know.


Q: So, is there a specific thing that you usually use when you're determining human health, like value of a statistical life?

A: Most of my empirical work has been with these surveys, these stated preference surveys [for example, here and here]. I've done a little bit of work which is revealed preference, looking at people's choices between jobs but that's a very big field and I haven't done as much.


Q: Are you interested in developing any new quantitative methods that would help in evaluating these health risks, or do you think the current methods are sufficient?

A: Well, a lot of what I do is refining the methods, so I think they're a good start, but they can be improved.


Q: In terms of benefit-cost analysis, what's the role you think it should play in risk assessment?

A: This is a question of terminology. Risk assessment usually means estimating the risk and how the risk would change if the conditions changed. So, one way to think about that is that it's a necessary input to benefit-cost analysis. For example, we know ways we can reduce air pollution. We know something about how that would change health risk, we know something about how much it would cost. But how do we decide if it's worth doing or not worth doing? So that's where the benefit-cost analysis comes in.


Q: Do you have a favorite paper that you've written or a subsequent result/policy that you helped enact because of your research?

A: Some of the theoretical things I’ve done on VSL are sort of pushing a new understanding of how it holds together and what it depends on [for example, this and this]. For policy stuff, I was lucky early in my career; I participated in some of the scientific workshops for the Montreal Protocol. I was doing part of the risk assessment, specifically forecasting what our chlorofluorocarbon emissions would be in the future without regulation. And then I worked with other people on an atmospheric model to see if we regulated to different levels, how much less ozone depletion would occur. That was pretty exciting to be a part of.


Q: Do you have anything that you're interested in researching in the future, like ideas that you want to get to when you have time?

A: Another topic I've been working on the past couple of years is what you could think of as an alternative to benefit-cost analysis, called a social welfare function. Utilitarianism is an example that probably most people know about. The idea is, you can have some estimate of how policy will change the well-being of everybody in a society, and then you want to add up all those changes, or the benefits and costs. The issue is, we don't know any way to measure changes in well-being that we're confident we can compare between people. Two people can have the same injury and say it's a painful injury, but some people tolerate pain better than others. We have no way to measure pain very objectively, so we can't say whose utility would be improved more if we could eliminate their pain. That's the big drawback, so you have to basically assume your way around measuring utility. But if you have that, then you can better deal with the distributional questions compared with benefit-cost analysis, which sort of inherently has this bias toward rich people built into it.


Q: How do you want your work to influence/affect the researchers who work in the field that you've performed the assessment or BCA on?

A: Well, a lot of what I think I do that gives me pleasure is clarifying things conceptually and focusing on the key elements. So, I hope a lot of what I’ve done helps people think more clearly about these problems and target exactly what they're doing.


Q: Do you feel like you’ve made an impact on environmental policy in general?

A: Yeah. Obviously, it’s a big field, and there are many people in it, so I’ve made my small little contributions. When people are thinking about VSL, they know that a lot of what I’ve written is helpful and they read that and say that it is.


Q: Do you feel like that’s your legacy, VSL specifically? Or do you think there’s like a broader thing that people can think of and say “that’s Dr. Hammitt”?

A: VSL I think is the big thing that people would look at because I’ve done so much of it. Perhaps more generally, I would hope, it’s the decision analysis perspective where you figure out how to quantify the magnitudes of effects and weight them by their probabilities and figure out how to estimate the probabilities.
Share this post:

Comments on "On Balance: So You want to Conduct a Benefit-Cost Analysis? Experts Share Their Stories"

Comments 0-5 of 0

Please login to comment