GSB | Chicago: Sunken Treasure, Foregone Pleasure: Career Detours Delay Smith’s Degree

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1930-39 | 1940-49 | 1950-59 | 1960-69 | 1970-79 | 1980-89 | 1990-93 | 1994-97 | XPIXP

AN INTERVIEW WITH STAN SMITH, ONE OF THE NATION'S LEADING EXPERTS ON FORENSIC ECONOMICS

STAN SMITH IS not a lawyer, but he reshaped the legal theory behind compensatory damages. He is not a deep sea diver, but he was responsible for one of the most significant shipwreck discoveries in recent years.

Smith was detoured from his doctoral studies onto a career path that took him from finance to Caribbean treasure hunting to courtrooms, and finally back to the GSB to finish his Ph.D. He proudly collected his degree in August–25 years after he started it.

Smith interrupted his M.B.A. studies for a stint in the military reserves in 1969, then returned to campus and entered the Ph.D. program. By 1972, his adviser, Art Laffer, left the university, and his motivation to finish his dissertation on international economics waned. After an internship with the Federal Reserve, Smith left school in 1973 and became a staff economist for First Chicago National Bank.

When Smith left the bank for the December Group, a venture capital firm, things got a little more adventuresome. “The firm had a lot of interesting projects,” Smith recalls, “including oil well drilling in Abu Dabi, Colombian oyster operations, and the hunt for the wreck of a 17th-century Spanish galleon, the Concepción.”

Smith, who is fluent in Spanish, negotiated a contract with the Dominican Republic and worked out other details of the treasure hunt, which would ultimately fail. But when the venture capital firm dissolved shortly afterward, Smith wasn’t ready to give up.

“Through utter serendipity, we learned of a guy in London who was writing a book about the Concepción,” Smith says, “He had new information about the wreck that helped us further narrow down its location. We knew we had to try again.”

Smith formed Seaquest International, Inc., in 1977 and spent two years planning and raising capital for a second search. An experienced diver was responsible for the actual undersea work; Smith describes his duties as “everything that didn’t get wet.” Ten days into the 1979 expedition, the partners located the most sought after wreck in the world, undisturbed since 1687.

“We found 50,000 pieces of eight, gold chains, and Ming porcelains from the early 1600’s,” Smith says, “It was amazing.”

Through Seaquest, Smith went on to salvage 26 ships; the Concepción was the first and biggest find, appraised at $32 million. Despite the excitement and potential for profitability, he left the business in 1981 in part because “operating as a treasure hunter in Latin American countries seemed dangerous, and I had my family to think about.”

Smith then set out on the relatively safer seas of economic and financial consulting. With Roger Ibbotson, Smith managed Ibbotson Associates, Inc., an economic and financial consulting firm. It was at Ibbotson that he was asked to testify in a personal injury lawsuit, an event that would again change the course of his career.

Sherrod v. Berry was a federal civil rights case involving a Joliet, Illinois, youth who was wrongfully stopped and then killed by a police officer. The youth and his father had a business partnership at the time of the incident, and the court was interested in an expert valuation of the lost business as well as the loss of the value of life.

Smith used his GSB quantitative and research skills to develop a method for estimating hedonic damages, or compensation for the loss of the ability to derive value and satisfaction from future remaining life expectancy, separate from lost earnings.

“I set out to measure the cost of life by looking at the cost of death,” he explains. He estimated that cost by looking at the amount of money people were willing to pay to reduce the risk of death. For example, Smith looked at smoke detectors. A smoke detector costs approximately $30, and one life is saved per 100,000 smoke detectors sold. On this model, each life saved is worth approximately $3 million. “Based on my research and the work of others, I worked up a general model that could be tailored to individuals based on age and other factors,” he says.

Based largely on Smith’s testimony, the Seventh Federal Circuit awarded for loss of value of life. Immediately the case was appealed; the main issue in question was whether the jury should have heard Smith’s testimony. The court determined that his input was “invaluable” to the case. Smith made the front page of the Wall Street Journal, and thus began his unforeseen career path in forensic economics.

“I never thought I’d testify twice on this topic,” Smith says, “but it has taken off. The debate over hedonic damages has appeared in dozens of law review articles and journals and has become a source of controversy.” Smith has testified in several hundred cases and has been involved in hundreds of others that settled out of court. This issue, which received a flurry of attention in both the academic and popular press in the mid-to-late ’80’s, is still controversial.

Meanwhile, Smith became one of the nation’s leading experts on forensic economics. He has written a complete textbook on the subject and has contributed chapters to other legal texts. He has also taught a related course at DePaul University in Chicago.

In the end, it was this unexpected career turn that would eventually lead Smith back to the GSB. As he continued to testify more frequently, Smith decided that his ideas needed stronger economic footing. University Professor Gary S. Becker, who won a Nobel Prize for applying economic principles to all areas of life, suggested that Smith carry out this research in the context of a dissertation.

“I was skeptical that they would take me back,” Smith admits, but he contacted Al Madansky, then associate dean for Ph.D. students, to discuss the possibility. “Madansky wrote back and warned me that I had two things going against me,” Smith says. “One, my knowledge and research skills were 15 years old, and two, I did not have a working relationship with a professor. But if I wanted to return, he said I could.”

Finally, in 1992, Smith went back to the books. Working with a committee consisting of Becker, Sam Peltzman, Sherwin Rosen, and Mark Zmijewski, Smith studied jury verdicts, doing a regression analysis by age, gender, extent of injury, punitive damages, and other factors. He found, surprisingly, that jury decisions are “highly explainable and rational and involve a lot of predictability.”

“My thesis was able to confirm that juries are awarding for injuries at a rate consistent with what economists observe individuals in the marketplace are expressing in terms of the value of life,” he says.
There’s one other lesson to be learned from Stan Smith: better late than never.

“Languishing ‘All But Dissertations’ from the GSB abound,” Smith says. “This one persisted, I am proud to say.”

–M.M.B.

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	PLEASE USE THE LINKS BELOW TO BROWSE FALL CLASS NOTES BY YEAR 1930-39 \| 1940-49 \| 1950-59 \| 1960-69 \| 1970-79 \| 1980-89 \| 1990-93 \| 1994-97 \| XPIXP



		AN INTERVIEW WITH STAN SMITH, ONE OF THE NATION'S LEADING EXPERTS ON FORENSIC ECONOMICS STAN SMITH IS not a lawyer, but he reshaped the legal theory behind compensatory damages. He is not a deep sea diver, but he was responsible for one of the most significant shipwreck discoveries in recent years. Smith was detoured from his doctoral studies onto a career path that took him from finance to Caribbean treasure hunting to courtrooms, and finally back to the GSB to finish his Ph.D. He proudly collected his degree in August–25 years after he started it. Smith interrupted his M.B.A. studies for a stint in the military reserves in 1969, then returned to campus and entered the Ph.D. program. By 1972, his adviser, Art Laffer, left the university, and his motivation to finish his dissertation on international economics waned. After an internship with the Federal Reserve, Smith left school in 1973 and became a staff economist for First Chicago National Bank. When Smith left the bank for the December Group, a venture capital firm, things got a little more adventuresome. “The firm had a lot of interesting projects,” Smith recalls, “including oil well drilling in Abu Dabi, Colombian oyster operations, and the hunt for the wreck of a 17th-century Spanish galleon, the Concepción.” Smith, who is fluent in Spanish, negotiated a contract with the Dominican Republic and worked out other details of the treasure hunt, which would ultimately fail. But when the venture capital firm dissolved shortly afterward, Smith wasn’t ready to give up. “Through utter serendipity, we learned of a guy in London who was writing a book about the Concepción,” Smith says, “He had new information about the wreck that helped us further narrow down its location. We knew we had to try again.” Smith formed Seaquest International, Inc., in 1977 and spent two years planning and raising capital for a second search. An experienced diver was responsible for the actual undersea work; Smith describes his duties as “everything that didn’t get wet.” Ten days into the 1979 expedition, the partners located the most sought after wreck in the world, undisturbed since 1687. “We found 50,000 pieces of eight, gold chains, and Ming porcelains from the early 1600’s,” Smith says, “It was amazing.” Through Seaquest, Smith went on to salvage 26 ships; the Concepción was the first and biggest find, appraised at $32 million. Despite the excitement and potential for profitability, he left the business in 1981 in part because “operating as a treasure hunter in Latin American countries seemed dangerous, and I had my family to think about.” Smith then set out on the relatively safer seas of economic and financial consulting. With Roger Ibbotson, Smith managed Ibbotson Associates, Inc., an economic and financial consulting firm. It was at Ibbotson that he was asked to testify in a personal injury lawsuit, an event that would again change the course of his career. Sherrod v. Berry was a federal civil rights case involving a Joliet, Illinois, youth who was wrongfully stopped and then killed by a police officer. The youth and his father had a business partnership at the time of the incident, and the court was interested in an expert valuation of the lost business as well as the loss of the value of life. Smith used his GSB quantitative and research skills to develop a method for estimating hedonic damages, or compensation for the loss of the ability to derive value and satisfaction from future remaining life expectancy, separate from lost earnings. “I set out to measure the cost of life by looking at the cost of death,” he explains. He estimated that cost by looking at the amount of money people were willing to pay to reduce the risk of death. For example, Smith looked at smoke detectors. A smoke detector costs approximately $30, and one life is saved per 100,000 smoke detectors sold. On this model, each life saved is worth approximately $3 million. “Based on my research and the work of others, I worked up a general model that could be tailored to individuals based on age and other factors,” he says. Based largely on Smith’s testimony, the Seventh Federal Circuit awarded for loss of value of life. Immediately the case was appealed; the main issue in question was whether the jury should have heard Smith’s testimony. The court determined that his input was “invaluable” to the case. Smith made the front page of the Wall Street Journal, and thus began his unforeseen career path in forensic economics. “I never thought I’d testify twice on this topic,” Smith says, “but it has taken off. The debate over hedonic damages has appeared in dozens of law review articles and journals and has become a source of controversy.” Smith has testified in several hundred cases and has been involved in hundreds of others that settled out of court. This issue, which received a flurry of attention in both the academic and popular press in the mid-to-late ’80’s, is still controversial. Meanwhile, Smith became one of the nation’s leading experts on forensic economics. He has written a complete textbook on the subject and has contributed chapters to other legal texts. He has also taught a related course at DePaul University in Chicago. In the end, it was this unexpected career turn that would eventually lead Smith back to the GSB. As he continued to testify more frequently, Smith decided that his ideas needed stronger economic footing. University Professor Gary S. Becker, who won a Nobel Prize for applying economic principles to all areas of life, suggested that Smith carry out this research in the context of a dissertation. “I was skeptical that they would take me back,” Smith admits, but he contacted Al Madansky, then associate dean for Ph.D. students, to discuss the possibility. “Madansky wrote back and warned me that I had two things going against me,” Smith says. “One, my knowledge and research skills were 15 years old, and two, I did not have a working relationship with a professor. But if I wanted to return, he said I could.” Finally, in 1992, Smith went back to the books. Working with a committee consisting of Becker, Sam Peltzman, Sherwin Rosen, and Mark Zmijewski, Smith studied jury verdicts, doing a regression analysis by age, gender, extent of injury, punitive damages, and other factors. He found, surprisingly, that jury decisions are “highly explainable and rational and involve a lot of predictability.” “My thesis was able to confirm that juries are awarding for injuries at a rate consistent with what economists observe individuals in the marketplace are expressing in terms of the value of life,” he says. There’s one other lesson to be learned from Stan Smith: better late than never. “Languishing ‘All But Dissertations’ from the GSB abound,” Smith says. “This one persisted, I am proud to say.” –M.M.B.
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