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Unit 4: Risk and Return

in jury study] To determine whether the safety improvement was worthwhile, the company Notes
used a value of $3 million per accidental death, which is the value used by the National
Highway Traffic Safety Administration in setting auto safety standards. The company
estimated that the annual safety benefits of this safer design would be $30 million (10
expected deaths at $3 million per death), while the cost would be $40 million. As a result,
the company believed that other safety improvements might save more lives at less cost.
The Ivey memo played a pivotal role in the July 9, 1999 Los Angeles jury verdict against
GM in a case involving a rear-end crash, which involved a rear- end crash into a 1979
Chevrolet Malibu. The record-setting verdict consisted of $107.8 million in compensatory
damages for the six burn victims as well as $4.8 billion in punitive damages. Many observers
speculated that the 1997 and 1998 landmark cigarette settlements of the state attorneys
general lawsuits provided an anchor that led the jury to think in terms of billions of
dollars rather than millions.

The basic facts of the case are similar to those of many other burn injury cases. On Christmas
Eve in 1993, Patricia Anderson was driving home from church with her four children and
a friend of the family. After slowing to stop for a red light, her Chevrolet Malibu was hit
from the rear by a drunk driver believed to be going fifty miles per hour by the plaintiffs
and seventy miles per hour by the defendant. The ensuing fire in the Malibu caused severe
burn injuries to the passengers, including some disfigurement.
Once again the Ivey memo played a prominent role in the courtroom battle even though
GM maintained that the memo did not contribute to the vehicle’s design. The cost of a
safer design that could have prevented the injury by moving the gas tank twenty inches
away from the rear bumper rather than eleven inches was $8.59 per vehicle, according to
evidence presented by the plaintiffs. The Ivey memo loomed particularly large as the
plaintiff’s attorney claimed that it showed that GM was “caught red handed.” According
to Ivey’s analysis, the cost to the company of fuel tank fires was $2.40 per vehicle. Linking
the memo with the $8.59 figure, which Ivey did not do, implied that the costs of safety to
the company outweighed the benefits.

The plaintiff’s lawyers demonized the GM decision as the result of an immoral calculation.
As one of the lawyers observed after the trial, “‘The jurors wanted to send a message to
General Motors that human life is more important than profits.” After the trial, jurors
highlighted this tradeoff: “Jurors told reporters that they felt the company had valued life
too lightly. We’re just like numbers, I feel, to them, one juror, Carl Vangelisti, told Reuters
Statistics. “That’s something that is wrong.”
By their very nature risk analyses convert life and death issues into statistics. Moreover,
benefit-cost tests intrinsically involve cost-health tradeoffs that some may find shocking.
One juror reflected a zero-risk mentality rather than a more rational risk tradeoff mentality
in her comment: ”There was no evidence that the car they put out there was as safe as what
they could have put out there.” But making such tradeoffs is inevitable. The task for the
courts and society is to overcome the kinds of biases shown in the experimental results
and vividly evidenced in the GM case.

Jurors’ reckless disregard for rationality is reflected in their justification for the $4.8 billion
punitive damages award. The jurors selected that figure by linking it to General Motors’
advertising expenses over a long period. Linking damages to advertising expenses is
entirely arbitrary. The amount was also “two-thirds more than GM’s entire profit for
1998,” which is a benchmark that shows the award magnitude, but is also unrelated to
safety decisions for 1979 Chevrolet Malibus. This kind of voodoo economics which the
jury viewed as a sound basis for decisions contrasts with the much more reasoned balancing

Contd...

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