Behavioral Aspects of Cost-Benefit Analysis

Abstract : Cost benefit analysis asks whether the expected benefits from a proposed activity outweigh its expected costs. Although based on an appealing premise and supported by a sophisticated methodology, these procedures have a number of characteristic limits on their usefulness as management tools. One set of limits is imposed by the unavailability of necessary inputs to the analysis. Neither the values nor the likelihood of many potential costs and benefits can be reasonably approximated by any formal computations. They must be derived in whole or in part by objective and reliable human judgment. Research has shown, however, that probability judgments are often quite unreliable and prone to systematic biases, while judgments of value are highly labile, changing with subtle (and formally irrelevant) shifts in the elicitation procedures. Relatively little is known about how to reduce these differences or assess the impact of those that remain. Related difficulties in assessing the quality of analyses comprise a second set of limits. There have been few systematic evaluations of formal analyses or attempts to develop a methodology for assessment. A third set of limits is the inability of the procedures to address critical issues in the management process they are designed to abet.