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Methods and principles for valuing life satisfaction

With a well-established correlation between wellbeing and life satisfaction and life satisfaction and income, we have the elements needed to estimate the monetary value of social parameters such as depression, stress and loneliness.

Specifically, this is done in two steps:

  1. Estimating the correlation between the social parameter of interest and subjectively assessed wellbeing (measured as life satisfaction). This is done in a regression where relevant control variables are included1.
  2. Monetization of the correlation between the social parameter and subjective wellbeing. This is done by using the willingness to pay per WELLBY.

In OSVB, you can find a number of social values that are valued from the above steps, based on English experiences and data. In the next update of OSVB, the values will gradually be based on Danish data.

Value of wellbeing change = [effect on life satisfaction] x [WELLBY]

The value of the social effect is given as the ratio between the importance of income and the social effect on life satisfaction

Valuing 1 point of life satisfaction per person per year (WELLBY)

Monetization of life satisfaction - willingness to pay as key

We define the value of changes in life satisfaction (measured on a scale of 0-10) by the unit WELLBY. A one-point change corresponds to one WELLBY, per person per year. We monetize the value of a WELLBY by establishing individuals' willingness to pay for a change in life satisfaction. Willingness to pay can be established in different ways. In OSVB, we basically follow the approach used in the UK Treasury - Wellbeing Guidance for Appraisal: Supplementary Green Book Guidance1. In future versions of OSVB, we will work on establishing willingness to pay using specific Danish data and different methods, including discrete choice experiments and quasi-experimental approaches using existing survey and register data.

The relationship between QALY, VOLY and WELLBY

The method OSVB is based on uses the well-established measure QALY (quality adjusted life years) and examines what it equates to in terms of WELLBYs - i.e. how many WELLBYs correspond to one year of life. The UK Treasury shows that a QALY is associated with a 7 point change in life satisfaction (going from 8 to 1). In Denmark, we do not have a monetary value for a QALY. However, the Danish Ministry of Finance has valued the "Value of a life year" - a VOLY, which is based on the value of a statistical life2. The UK Treasury has chosen to value a QALY3 and a VOLY the same, so one VOLY equals one QALY. Based on this, it is assumed that the Danish VOLY value can be used to value our WELLBY. In 2021, the Danish Ministry of Finance valued the value of one year of life, one VOLY, at DKK 1.3 million per year4.

The value of one point of life satisfaction (the value of a WELLBY)

Based on the above assumptions, we can derive a Danish value for one point of life satisfaction.

Willingness to pay for a WELLBY = VOLY/(8-1) = £1,300,000/(8-1) = £185,714 (2021 prices)

A one-point change on the life satisfaction scale has a value of 186,000 DKK per person per year (2021 prices)