Wednesday, 7 May 2014

Valuing Life Satisfaction

Recent Social Return on Investment (SROI) work has had me explaining ‘life satisfaction’ valuation. Time to share this with a wider audience, as it is part of understanding SROI as a whole. Life satisfaction, sometimes known as well-being valuation, is one of a number of ways in which social outcomes can be given an equivalent financial value.

To begin, we have to accept that there is such a thing as an average level of life satisfaction. If you doubt me, check the Office for National Statistics (ONS), which since 2012 has produced data on life satisfaction. For example, it reported in 2013 that average UK life satisfaction had increased from 7.4 to 7.5 over the past year (whoopee!).

More detailed analysis relies on Understanding Society, a much more comprehensive survey of many thousands of people each year. This compares (amongst other things) life satisfaction for people in different situations and also with differing levels of income. Like it or not, income does affect happiness; generally, the more the better, at least up to a certain high income level.

So people who have a particular disadvantage in life (for example, a breathing problem such as asthma) will on average have lower life satisfaction. But some of this group might have a higher income level, which would compensate for this and bring them back up to the national average. Working out the exact compensating income requires detailed statistical calculation, but can be done. It turns out that for asthma the figure is just over £2200 per year.

Similar calculations can be applied to a range of other situations around people's housing, health, education, employment, family and other relationships. In some cases this produces figures that seem very high, particularly around mental health and social relationships. Here we need to remember that such valuations can be absolute (i.e. all or nothing), whilst in practice people will experience just some degree of improvement in these situations.

It's also important not to think of this on a personal basis. It's not what you might choose to pay to achieve or avoid a particular situation (that's a different valuation technique, known as willingness to pay). Rather, it's a statistical average from the population as a whole.

I believe that life satisfaction valuation can be very useful, particularly as it avoids some of the bias inherent in other techniques. However, it should come with a "handle with care" label, because any valuation must be applied in an appropriate context for the right group of people.

For real credibility, we also need to see acceptance of life satisfaction on a wider basis. The ONS data supports some government rhetoric on "more to life than GDP". But it is hard to see this translated into aspects of the actual government policy – particularly given recent news on the impact of cuts on mental health care. I look forward, hopefully, to the day when life satisfaction becomes more than just figures in SROI reports, and really matters to policy-makers.