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Cost-benefit analysis, goal-based decision analysis, and Dave Krantz’s talk

Carrie McLaren has an interesting interview with Frank Ackerman and Lisa Heinzerling in the current Stay Free magazine, on the topic of cost-benefit analysis, as it is used in environmental regulations (for example, how much money is it worth spending to reduce arsenic exposures by a specified amount). Apparently, a case of chronic bronchitis has been judged to have a cost of $260,000, and IQ points are worth $8300 each. Ackerman and Heinzerling argue that cost-benefit analysis is “fundamentally flawed,” basically because it involves a lot of arbitrary choices that allow regulators to do whatever they want and justify their choices with numbers.

This made me a little worried, since I’ve done some cost-benefit analysis myself! In particular, I’m sympathetic to the argument that cost-benefit analysis requires arbitrary choices of the value of a life (for example). Garbage in, garbage out, and all that. But, on the plus side, cost-benefit analysis allows one to quantify the gains from setting priorities. Even if you don’t “believe” a particular value specified for value of a life, you can calculate conditional on that assumed value, as a starting point to understanding the full costs of different decision options.

With this mixture of interest and skepticism as background, I was interested to read the following exchange in the Stay Free interview:

Stay Free: To play devil’s advocate, proponents of cost-benefit analysis argue that obviously some ways of preserving our environment or our health are cheaper and better than others, so can’t cost-benefit analysis help with that?

Heinzerling: It doesn’t necessarily help with that. What might help is setting a goal and then thinking about creative ways to get to that goal most cheaply.

[back to me:] OK, but what’s the difference between (a) setting dollar values for various risks and then doing cost-benefit analysis, and (b) setting a goal and then trying to achieve it most cheaply? Either way, you’ll choose a point along the “efficient frontier” of non-dominated strategies. Setting the dollar values or setting a goal are just two different ways of parameterizing where you’ll end up on that frontier.

Well, this stuff still confuses me, but according to Dave Krantz of the psychology department at Columbia, there is an alternative framework of decision analysis based on goals, rather than utilities, that is a better fit to how people actually make decisions (and perhaps how they should make decisions). Basically, the claim is that, in practice, (a) and (b) of the previous paragraph are not the same.

P.S. See here for possibly more discussion on this.

One Comment

  1. vijay says:

    Please let us know about the cost benefit analysis of TB It may be helpful for my research work.

    thanking you sir

    yours faithfully