Wellbeing and cost-benefit analysis
Subjective wellbeing has the potential to lift our social CBA game, helping us put valid, credible numbers on intangible social values
When we're evaluating the benefits and costs of social programs, it’s often challenging to convert intangible values (like friendship, love, hope, trust, or happiness) into monetary valuations. As a result, cost-benefit analyses may exclude important benefits or may be deemed infeasible.
WELLBYs (a measure of subjective wellbeing) offer a conceptually valid and empirically robust way of valuing the impacts of intangible factors on overall life satisfaction, opening up more possibilities for including CBA in program and policy evaluation.
Cost-benefit analysis is typically based on a utilitarian model of welfare...
Social cost-benefit analysis, grounded in welfare economics, seeks to understand whether an intervention (e.g. a policy, program or project) makes society better or worse off. Although CBA uses money as the unit of measurement for costs and benefits, it is really concerned with welfare. Traditionally, a construct called utility is used to (imperfectly) represent welfare, and a unit of measurement called money is used to (imperfectly) estimate the value, to people, of gains and losses in utility that they experience as a result of an intervention. At least that’s what it’s conceptually about, even if our CBA in practice is a bricolage of values drawn from cost centre reports, market prices, willingness-to-pay estimates, proxies drawn from literature and values-banks, and educated guesses.
...but there are alternatives to utility, including subjective wellbeing.
For a long time (even pre-dating utilitarianism) there have been other ways to measure wellbeing. These measures can either be expressed in their native units or converted into monetary valuations. On the ascendant right now is something called subjective wellbeing. This has the potential to lift our social CBA game, helping us put valid, credible numbers on intangible social values.
What's so good about subjective wellbeing?
It moves the monetary valuation closer to the phenomenon of interest. Subjective wellbeing represents individuals’ summative evaluations of their own lives. With the right tools and techniques we can measure changes in subjective wellbeing and investigate to what extent those changes might be caused or influenced by a particular intervention.
Now, I’m not an advocate for single-indicator evaluation. But as far as indicators go, this one can hold more information than most. In a sense, it can also be viewed as a way of democratising evaluative judgment-making because, rather than an analyst conducting a CBA and making a judgement from its outputs, eliciting subjective wellbeing states is akin to asking citizens to give us their judgements, which we can then aggregate using CBA. Adding this tool to our kit can only enrich society’s capacity to evaluate, though it mustn’t come at the expense of other approaches such as deliberative democratic approaches.
An example
The New Zealand Treasury's latest CBAx tool includes a value of between NZ$6,700 and $25,400 per person per year for a one-point change in life satisfaction on a 10-point scale. The points on this scale are known as "WELLBYs".
We can use WELLBYs in program and policy evaluation if we can estimate the change in people's life satisfaction that may be attributed to an intervention. For example, we could take longitudinal measurements before and after an intervention by asking participants receiving the intervention to rate their life satisfaction at two or more points in time. We could also ask a group of people not receiving the intervention to rate their life satisfaction at the same time points, providing a comparison group.
The question we would ask is along the following lines:
I would like to ask you about your feelings on aspects of your life. There are no right or wrong answers. I'd like you to give an answer on a scale of 0 to 10, where 0 is "not at all" and 10 is "completely". Overall, how satisfied are you with your life nowadays?
Ideally, the wellbeing question would be asked near the beginning of any interview or survey, so that the response isn't influenced by any other questions. (Thanks to Dr Aaron Schiff for this explanation).
Where do the monetary valuations of WELLBYs come from?
Practical answer: We can grab them straight off the internet! For example, NZ Treasury’s WELLBY values are in the Impacts Database tab of the CBAx spreadsheet.
As another example, the Happiness Economics Research Group at McGill University has published a draft Canadian Database of Happiness Coefficients (which can be converted to monetary valuations) and this open-access article about their curation principles.
Yes, but where do they really come from?
Conceptual answer: There are various ways of valuing changes in life satisfaction in monetary units. One set of approaches involves estimating the change in income that would cause a change in life satisfaction of an equivalent magnitude to that attributed to the intangible benefit. To illustrate a little simplistically, if a $20,000 net pay rise gives a group of people an average subjective wellbeing increase of 3 WELLBYs, and if a successful intervention to reduce stress also gives them a 3-WELLBY boost, then we can argue that reducing stress in this population has an equivalent value of $20,000.
To dive into the conceptual models and methods that underpin approaches to valuing changes in life satisfaction, take a look at the UK Green Book supplementary guidance and Frijters & Krekel’s Handbook for Wellbeing Policy-Making (full reference below).
Cost-benefit analysis, like any method, has strengths and limitations
CBA estimates something important, and we should be interested in what it tells us. It provides an approximate answer to an important question - Is society better off? - through the lens of Kaldor-Hicks efficiency. Subjective wellbeing measurement could help us answer that question in a wider range of situations.
As far as I’m concerned there are no gold standards in evaluation, nor any silver bullets. As with any method, we need to be mindful of issues like construct validity and measurement error. We need to consider the limitations of importing a valuation from another context into our context, especially but not only when using valuations from another country.
Overall, CBA can contribute unique insights from a specific viewing angle. We shouldn’t rely on CBA’s outputs as the sole indicator of social value, but we should be open to incorporating it in our evaluations, alongside other evidence and values. As always, evaluative judgements are necessary, weighing multiple considerations.
See the posts below for a deeper dive into the features, strengths and limitations of CBA and how we can put it to good use in mixed methods evaluation.
Previous posts on CBA:
With great power comes great responsibility - a presentation on CBA through an evaluative lens
Social Return on Investment vs cost-benefit analysis - how different are they really?
Acknowledgement
Thanks to Dr Charles Sullivan for peer reviewing a draft of this article. Any errors or omissions are my responsibility. As always I welcome your feedback.
Addendum
I’ve yet to try WELLBYs in a real CBA. Over on LinkedIn, Andrew McDougall commented:
In my experience, if you use primary research to gain a statistically significant difference in ‘participant’ and ‘non-participant’ self reported wellbeing, often ~10%, and use WELLBYs to monetise, the values are extraordinarily high; especially if you’ve used a different technique, such as choice modelling, to cross check results with. There seems to be an ongoing issue with equating the change in SRWB with income that leads to a similar change.
So that’s something to be mindful of.
Also see:
Frijters, P., Krekel, C. (2021). A Handbook for Wellbeing Policy-Making: History, Theory, Measurement, Implementation, and Examples. Oxford Academic. https://doi.org/10.1093/oso/9780192896803.003.0003
He Ara Waiora: a framework that helps the NZ Treasury to understand waiora, a concept that relates to Māori perspectives on wellbeing and living standards.
NZ Treasury Living Standards Framework.
See also: https://www.linkedin.com/posts/mitchell-malone-58210290_wellbeing-and-cost-benefit-analysis-activity-7188765696992935936-iGsC?utm_source=share&utm_medium=member_ios
Great article Julian - you have a skill in explaining complex constructs quite clearly. Thanks for sharing