Cost-Benefit Analysis (CBA) is a decision process that makes you put a number—usually dollars—on the costs and benefits of every alternative. One chooses the alternative that has the greatest total benefit net of total cost.
We can estimate the value of hard costs like construction, opportunity costs like alternative uses of money as well as benefits like improved productivity. CBA is helpful in getting people to think rigorously about whether a proposed project or investment makes sense. However, it does not handle well qualitative factors, which can be just as important. These include:*
- Company culture/politics/public relations
- Product/service/experience quality
- Competitors and SWOT (strengths, weaknesses , opportunities and threats)
- Human aspects (motivation, morale, engagement, retention)
- STEER (socio-cultural, technological, economic, ecological and regulatory)
By the way, just because they’re qualitative doesn’t mean our views of these factors are subjective (au contraire). Almost everyone will agree that, in the typical day-to-day context, violence is objectively bad.
So, how to make decisions using qualitative factors? I’ve always thought the best way was to force some quantitative scoring. For example, the Cézanne below gets a 9/10, while the Duchamp gets 3/10 in my book. Honestly, though, do numbers make any sense here?
|Marcel Duchamp [Public domain], via Wikimedia Commons
|Paul Cézanne [Public domain], via Wikimedia Commons
A scientist that I met at a conference recently had an elegant solution. It’s an approach which he says he’s improved upon to “find the missing heritability in genetics” and uncover a potential treatment for autism. Here’s how a simplified version of the objective scoring process works, applied to the purchase of artwork.
Say I’m looking to buy artwork for my home. I might consider aesthetics, subject matter, medium, color palette, provenance and personal relationship with the artist as criteria. I would even add general intuition and the desire to own the object. I’d compare each piece to the others with respect to a ‘profile’ of those eight criteria. If there are twenty artworks I’d make (N-1)N/2 = 19*20/2=190 comparisons. Next, for each artwork, I count the number of artworks that it is superior (or equal) to on all dimensions and subtract the number of works which dominate it. This is what statisticians refer to as the U-Statistic. The artwork that does the best job of dominating the rest wins.
At the very least, this is a good test of my devotion to rational, qualitative decision-making! While it is a very time-consuming process when done by hand, a computer can speed it up. The key benefit is it gives me confidence that I’ve considered everything without having to force an arbitrary quantification of qualitative variables.
Of course, there will usually be quantitative variables too: price, edition number and expected investment return come to mind.** How to combine the quantitative and the qualitative? What if artwork A is top ranked qualitatively and bottom ranked on quantitative metrics?
In the same way that the qualitative factors reflect personal values, so does the relative weight one places on each criterion, whether qualitative or quantitative. It’s these values that make us human and our institutions humane. One should make decisions using both qualitative and quantitative metrics that reflect the values of the kind of person or organization we desire to be.
**The scientist I mentioned above found a way to create subsets of categories as well, such as human aspects, STEER, … before creating an objective overall score. Learn more at www.asdera.com.