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Your Money or Your Life: A Prescriptive Model for Health, Safety, and Consumption Decisions

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  • James E. Smith

    (Fuqua School of Business, Duke University, Durham, North Carolina 27708)

  • Ralph L. Keeney

    (Fuqua School of Business, Duke University, Durham, North Carolina 27708)

Abstract

In this paper we develop a conceptual framework and model for valuing risks to an individual's health and life and to support decision making about investments in health, quality of life, and safety. Our treatment of health risks in the model builds on the popular quality-adjusted-life-year (QALY) framework that balances health quality and length of life issues. We extend this framework to consider financial concerns as well as health quality and length of life. Our model considers uncertainty in income and health and incorporates the decision maker's ability to adjust consumption over time in response to changes in expectations about health and income. We use this model to study the optimal tradeoffs between financial gains or losses and improvements or reductions in health or longevity and apply it in two example medical decision problems.

Suggested Citation

  • James E. Smith & Ralph L. Keeney, 2005. "Your Money or Your Life: A Prescriptive Model for Health, Safety, and Consumption Decisions," Management Science, INFORMS, vol. 51(9), pages 1309-1325, September.
    • Handle: RePEc:inm:ormnsc:v:51:y:2005:i:9:p:1309-1325
    DOI: 10.1287/mnsc.1050.0402
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    3. James K. Hammitt, 2020. "Valuing mortality risk in the time of COVID-19," Journal of Risk and Uncertainty, Springer, vol. 61(2), pages 129-154, October.
    4. Hansen, Kristian S. & Moreno-Ternero, Juan D. & Østerdal, Lars P., 2023. "Productivity and quality-adjusted life years: QALYs, PALYs and beyond," Working Papers 11-2023, Copenhagen Business School, Department of Economics.
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    6. Richard Cookson & Ieva Skarda & Owen Cotton‐Barratt & Matthew Adler & Miqdad Asaria & Toby Ord, 2021. "Quality adjusted life years based on health and consumption: A summary wellbeing measure for cross‐sectoral economic evaluation," Health Economics, John Wiley & Sons, Ltd., vol. 30(1), pages 70-85, January.
    7. Kenneth C. Lichtendahl & Samuel E. Bodily, 2010. "Preferences for Consumption Streams: Scale Invariance, Correlation Aversion, and Delay Aversion Under Mortality Risk," Operations Research, INFORMS, vol. 58(4-part-1), pages 985-997, August.
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    9. Donnelly, Catherine & Guillén, Montserrat & Nielsen, Jens Perch, 2014. "Bringing cost transparency to the life annuity market," Insurance: Mathematics and Economics, Elsevier, vol. 56(C), pages 14-27.
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    11. Hammitt, James K. & Tuncel, Tuba, 2023. "Monetary values of increasing life expectancy: sensitivity to shifts of the survival curve," TSE Working Papers 23-1416, Toulouse School of Economics (TSE).
    12. Kenneth C. Lichtendahl & Raul O. Chao & Samuel E. Bodily, 2012. "Habit Formation from Correlation Aversion," Operations Research, INFORMS, vol. 60(3), pages 625-637, June.
    13. James K. Hammitt & Tuba Tunçel, 2023. "Monetary values of increasing life expectancy: Sensitivity to shifts of the survival curve," Journal of Risk and Uncertainty, Springer, vol. 67(3), pages 239-269, December.
    14. Hansen, Kristian S. & Moreno-Ternero, Juan D. & Østerdal, Lars P., 2024. "Quality- and productivity-adjusted life years: From QALYs to PALYs and beyond," Journal of Health Economics, Elsevier, vol. 95(C).
    15. Kenneth C. Lichtendahl & Samuel E. Bodily, 2012. "Multiplicative Utilities for Health and Consumption," Decision Analysis, INFORMS, vol. 9(4), pages 314-328, December.
    16. Reza Yaesoubi & Stephen Roberts, 2010. "A game-theoretic framework for estimating a health purchaser’s willingness-to-pay for health and for expansion," Health Care Management Science, Springer, vol. 13(4), pages 358-377, December.
    17. William B. Haskell & Wenjie Huang & Huifu Xu, 2018. "Preference Elicitation and Robust Optimization with Multi-Attribute Quasi-Concave Choice Functions," Papers 1805.06632, arXiv.org.
    18. Ehsan Taheri & Chen Wang, 2018. "Eliciting Public Risk Preferences in Emergency Situations," Decision Analysis, INFORMS, vol. 15(4), pages 223-241, December.
    19. Strand, Jon, 2006. "Valuation of environmental improvements in continuous time with mortality and morbidity effects," Resource and Energy Economics, Elsevier, vol. 28(3), pages 229-241, August.
    20. Gerrard, Russell & Hiabu, Munir & Kyriakou, Ioannis & Nielsen, Jens Perch, 2019. "Communication and personal selection of pension saver’s financial risk," European Journal of Operational Research, Elsevier, vol. 274(3), pages 1102-1111.
    21. James E. Smith & James S. Dyer, 2021. "On (Measurable) Multiattribute Value Functions: An Expository Argument," Decision Analysis, INFORMS, vol. 18(4), pages 247-256, December.
    22. Richard Cookson & Owen Cotton-Barrett & Matthew Adler & Miqdad Asaria & Toby Ord, 2016. "Years of good life based on income and health: Re-engineering cost-benefit analysis to examine policy impacts on wellbeing and distributive justice," Working Papers 132cherp, Centre for Health Economics, University of York.
    23. Baruch Keren & Joseph Pliskin, 2011. "Optimal timing of joint replacement using mathematical programming and stochastic programming models," Health Care Management Science, Springer, vol. 14(4), pages 361-369, November.
    24. Bruno S. Frey & David A. Savage & Benno Torgler, 2009. "Surviving the Titanic Disaster: Economic, Natural and Social Determinants," CESifo Working Paper Series 2551, CESifo Group Munich.

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