Is Cost-Benefit Analysis Appropriate for Complex Decisions?
Strategy+Business does a good job of covering viability of cost-benefit analyses. The bottom line appears to be that pure cost-benefit analysis may only apply in the simplest of situations:
It is inadequate for evaluations of interventions that will affect many different dimensions, such as markets, economies, health, the environment, and endangered species. Cost-benefit analysis is also inappropriate for products or processes over which there are disagreements about benefits or about which outcomes are important, such as new medical technologies like genetic testing. And it should never be used as the basis for regulation in the presence of scientific uncertainty or value conflicts, or in an area where there are no authorities one can trust to know all the answers, as is the case with biotechnologies such as genetic engineering and stem cell research.
This leaves little to apply numbers based cost-benefit analysis to. Fairly simple construction projects come to mind. My experience is that cost-benefit analysis, to be effective, must focus on a few value points that are completely analyzed and vetted with a group of executives. Over complicating with too many value points leads to confusion and a credibility gap.
The article appears to agree and expands on this point:
Decisions like these require a more expansive methodology - one that isn’t dependent on the affectation of translating all value into economic terms, that is more transparent and responsive to outside criticism, and that pragmatically represents the interests of everyone involved: industry, government, and the public.
Inclusion seems to be the key. But we must remember that a business is NOT a democracy. Therefore a rationale and value for inclusion must be considered.
How have you included others in cost-benefit analysis? Was there a hesitancy to consider other opinions because of fear of violating your assumptions?
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POSTED IN: 101 Basics, Value Selling Projects
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