What does a forensic economist actually calculate in a personal injury case?

Measuring value is an economist’s stock in trade. But value changes as conditions change. The example I used in class for years was a bottle of water. To someone stranded in the desert with no water, food, or way out, that bottle may be priceless. To the average person standing a few steps from a drinking fountain, it may not be worth much at all.

Market prices work differently. They’re set by supply and demand — roughly speaking, how much of something is available at a given price, and how much people want it at that price. It’s the interaction of the two that ultimately sets the price everyone actually pays.

So are price and value the same thing? Not necessarily. A market price is the result of every buyer and every seller acting together. Value, on the other hand, is personal. Say Mary finds a purse on sale for $40, and she would have paid up to $50 for it. Her own value for the purse was $10 higher than what she ended up paying. That gap between price and personal value is real, but it’s also invisible — nobody else can observe it, measure it, or verify it. The market price, by contrast, is right there for anyone to see.

That distinction is the whole reason economists rely on market prices, not personal value, when measuring damages. A damages calculation has to be built on something observable and defensible — not on what an injured person might have privately believed their lost time or lost work was worth to them.

With that foundation, here’s what an economist is actually trying to answer in a personal injury case:

1. What was the injured person earning before the injury?
2. Did they have a legitimate prospect of earning the same or more in the future?
3. Did the injury damage those prospects?
4. If so, by how much, and for how long?
5. Are there reasonable steps the injured person could take to mitigate the damage?
6. Are there ongoing costs the injured person will bear into the future?
7. What is the value of all those future losses, measured in today’s dollars?

That last question — converting future losses into today’s dollars — is its own piece of the puzzle, and I’ll come back to it in a moment.

To stay objective, the economist measures all of this using market prices — what someone in this position could actually have earned, not what they might have felt they deserved. The gap between pre- and post-injury earning capacity is often established with the help of an occupational therapist. Before the injury, the person might have worked in a warehouse lifting heavy boxes. After the injury, they may be medically restricted to a lighter weight limit. That restriction raises the next question: what jobs can this person actually get and hold now? The difference between their pre-injury earnings and the highest-paying job they’re now qualified for is a direct measure of the loss.

But these losses play out over time, not all at once. How far into the future? For the rest of the person’s working life? How does a reduced earning capacity affect their eventual retirement? Answering these questions draws on occupational therapists, physicians, and statistics — government labor and mortality data, in particular, which help attach real probabilities to different outcomes rather than guesses.

Now, back to that last question on the list: converting future losses into today’s dollars. Most people already have an intuitive sense of this, even if they’ve never called it “present value.” A dollar in your hand today is worth more than a dollar promised to you a year from now — because the dollar in hand today can be invested and grow.

Here’s a simple version. Suppose someone owes you $100, payable one year from today. If they instead offered to pay you today, how much would you be willing to accept right now in exchange for waiting? If you could earn 5% interest on your money, you’d accept any amount that would grow to $100 in a year at that rate. That amount is $100 ÷ 1.05, or $95.24. Invest $95.24 today at 5%, and in a year you’ll have your $100.

That’s the same logic an economist applies to a stream of future losses spread out over a working life — each future dollar of lost earnings gets converted into its present-day equivalent, so the final number reflects what those losses are actually worth today, not just their face value added up.

This is the 30,000-foot view of what a forensic economist does when estimating economic damages in a personal injury case. In practice, it gets more complicated than what’s covered here — which is exactly why you hire an expert.