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Real Estate and Business

How To Manipulate Cost-Benefit Analysis

Cost-benefit analysis is an approach to making decisions that examines the costs of an initiative compared to its benefits.  In most cases, the goal is to generate more total benefits than the total costs. 

TB (Total Benefits) > TC (Total Costs)

However, in situations whereby services have to be provided by obligation, such as the provision of municipal firefighting services the goal is to meet the total required benefits regardless of the costs.  Of course, urban planners attempt to minimize delivery costs through locational analysis.

It is important to remember that cost-benefit analysis is a way of making decisions, or more precisely a way of justifying decisions. I say this because the reality is that there is much politics behind corporation and government decisions, whereby those politics supersede any other consideration. Therefore, cost-benefit analysis often becomes a tool to rationalize a decision rather than to assess the project.

There are various ways to manipulate cost-benefit analysis.  The most common used by bureaucrats is to intentionally underestimate the cost of a project in order for it to make sense.  In cases of large billion dollar projects that take years to implement, if the politicians or bureacrats are still in power then it will haunt them. 

Then there is the narrow vision technique for manipulating cost-benefit analysis.  With this method you simply close your eyes to some of the not so obvious costs of projects and leave them out of the equation.  Narrow vision also applies to the time-frame that is used.  Evaluating As as example lets look at public transit (buses) versus private transportation.  It is obvious that a bus can hold 52 people or more, while most automobiles can hold 4.  But does that mean that a bus is 13 times more effective than a car?  Let’s look at the different components:

 

Bus   Car  
Pros Con Pros Con
carries 52 passengers takes up more space door-to-door parking
only way for those without cars reduces traffic because of stops flexible schedule stress
  has to travel route even if empty   car accidents
  requires a driver    
  breakdown affects 52 workers    
  some have to drive to bus stop    
  exposure to public viruses    
  loud    
  not good for getting to hospital    
  not good for commercial deliveries    
  difficult for strollers and wheelchairsextra wear and tear on roads  

There are many more considerations.  But, this is enough to make the point:

– how many of the possible considerations get included in the analysis?

– how are the different considerations valuated?

It doesn’t take much to manipulate the analysis at this level to be able to favour one outcome or the other.

Next time someone presents you with a cost benefit analysis you’ll know to ask “What was not included in the consideration and why?” and “How did you valuate the different considerations?”.

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