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The Cost Of Preventing Mistakes: The Value Of A Human Life

Reading this reminded me that the FAA puts a value on human life and that is how they make decisions on what safety measures should be implemented.

Mohnish Pabrai explains:

What the FAA has done — and it’s been very, very effective — is to put a price on a human life. According to the FAA, a human life in 2009 is worth three million dollars. That’s what you’re worth, according to that agency. What that means is that if there is a plane crash and 100 people die, the first thing they know is that the human cost of the incident is $300 million. And 20 years ago, the worth was one million dollars, so we’ve seen inflation over the years. Every year, the FAA bumps up that number. They’re very, very anal about that number; they care about that number a lot.

You may notice that the only time change happens in aviation is after a plane crash. The FAA doesn’t do anything until there’s a plane crash. That’s why it's called “the death agency” because it only gets involved after people have died or a plane has crashed. I’ll give you an example. Recently, we saw that plane go down in the Hudson when it took all those 40-pound Canadian Geese into the engines. In 1960, there was a dual engine bird hit on an airplane. The plane went down, everyone died, and FAA officials came in and looked at what happened. They looked at the bird situation, and they changed the rules for designing jet engines at that time. They said that if you design jet engines, they have to be able to withstand a direct bird hit and shut down without any parts flying out. And of course they were, at that time, testing these engines with small birds.

So they found that you could change the jet engine design without that much of a significant cost overrun. So they mandated this in the '60s. By the time those airplanes became kind of main stream, you could say by 1980 or 1985, all the old airplanes were gone. The new ones all had the new jet engines, and so fatalities from bird-hits pretty much went away. Bird hits in engines are extremely common because engines suck in stuff. The way they’re designed, they’ll just pull in stuff that’s within a big radius. But we never hear about these incidents – there’s nothing on the front page about a bird hit yesterday, yet it happens every day.

So those airplanes have now gotten to the point where they can go without much of an issue after a small bird hit; single bird hits are not an issue. But planes aren't designed for Canadian geese hitting both engines, which weigh about 40 pounds a piece. And there were multiple Canadian geese that hit those engines.

If the FAA took the approach that the engine still worked after a bird hit, a round trip from L.A. to New York is going to cost one million dollars because that would take the cost of aviation out of sight. In fact, I don’t know if they can even do that. But what aviation companies will do is look at the number of people that will die in some kind of reasonable period of time; they’ll do some models, and they’ll figure out what amount they have to spend. If they believe that 100 people are going to die if they don’t do anything, that’s $300 million. So they’ll ask themselves, “Can we fix this issue for $300 million?” And if the answer is no, they will not do it. It’s a very pragmatic approach, and it works very well.

The nuclear industry in the U.S., however, did not take that approach. After Three-Mile Island, the nuclear industry in the U.S. said, “We will never have an accident, no matter what. It’s just not acceptable.” The end result is that the U.S. has the highest cost of building nuclear power plants in the world. We haven’t built one in 20 or 30 years. We get our power in all kinds of other strange ways. We don’t get it from nuclear. France gets 80 percent of its power from nuclear power. In the U.S., there’s a huge taboo about nuclear power, and the reason is that nobody took an approach like the FAA did. The U.S. nuclear industry never came up with a cost for human life. The nuclear industry approach was, “We can never lose a single life, period.”

But if we have a mandate that a microwave oven can never, ever fail, well, all our microwave ovens will cost one million dollars a piece. The moment you mandate that something have a zero error rate, you will take the cost off the charts, which is exactly what happened to the U.S. nuclear industry. And so, in fact, if the United States builds a new nuclear plant today, the cost of that plant is ridiculously higher than the cost of a plant anywhere else in the world. That's the reason nuclear power is dead in this country because we don’t have a practical approach to tolerating error. We’re taking an, I would say, irrational approach that we're never going to have any accidents, period. So the FAA stance is very compelling. We have $300 roundtrip flights across the country because of the pragmatism, and it works.

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