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Incorporating Qualitative Factors in Transportation Decision-making

Posted by on in Cost-Benefit Analysis
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When funds are short, agencies are often challenged to justify decisions about which projects to do and not to do. One way that agencies address this situation is by conducting cost-benefit analysis, which quantifies all of the potential benefits of projects relative to their costs and compares which investments seem to offer the best outcomes for the money. Agencies may use cost-benefit analysis to justify a particular project (showing its benefits are more than its costs) or to rank projects based on which ones offer the most benefits per dollar spent (often regarded as a ‘prioritization’ process). Using economic methods to compare the benefits of projects can be an extremely useful and powerful tool both for decision making and for explaining choices to stakeholders. However, challenges arise when agencies find that there are “intangible” (or difficult to quantify) outcomes which are known to be important.

For example, how does an agency decide or explain whether it is worthwhile to expand the scope of a project to save a species from extinction? How does an agency decide the relative importance of preserving the aesthetic quality of a scenic byway in comparison to favoring a less expensive design that may save hours of travel time and reliability?

When benefits are hard to quantify, it is important to realize that dollars are not the only (or always the best) way to describe outcomes. . One of the limitations of cost-benefit analysis as a prioritization method is the fact that some investment outcome show up monetary transactions (dollar values) and others are rarely ever priced or traded in the economy.

For example, aesthetic improvements (beautification), journey ambiance, wildlife preservation/protection and some aspects of sustainability/livability (e.g., walkability) while sometimes indirectly related to property values, public health or other outcomes are often hard to consistently monetize at the project level. Often general community, national or global values of these outcomes are difficult to isolate from other important considerations in investment decision making. Furthermore, even when attempts are made to describe these seemingly intangible factors are in dollar terms, the economic benefits often are dwarfed by the travel time, reliability, safety and environmental benefits of projects tied to more traditional performance areas.

It is tempting to believe that the solution to the problem is simply to guess, or develop some sort of consensus estimate of economic values for use in cost-benefit analysis. Even when the objective of such exercises is to inspire needed debate and discussion about what these factors are worth, such efforts can be misleading by conveying a false sense of relative value relative to other more readily quantifiable factors. It may be alluring to believe that simply picking a value (any value) for these unknowns helps make cost-benefit analysis a more helpful and reliable tool in the planning process. However, supplementing the trade-able monetary the benefits of transportation outcomes with “hypothetical” values for intangible variables can severely undermine the credibility of the analysis and misdirect prioritization discussions into impertinent debates about the dollar value of intangibles. For example, dialogue could easily degenerate from a practical discussion about whether it makes sense to spend $1 million to preserve 10,000 acres of forest to an emotionally charged ecological accounting debate about whether the life of a loon is worth more than the life of a lizard.

At the best, the resulting hypothetical dollar values reflect a biased “pseudo-consensus” (or general agreement among people who will never actually spend or receive the money in question). Using such estimates alongside ‘actual’ transaction values (such as the cost of time, mileage and property damage) is a bit like using monopoly money (with a speculated hypothetical value occurring only in a particular game) in trades also involving “real” money (which can actually be traded for goods and services outside of the ‘game’). It becomes very easy to lose track of what a “dollar” is really worth, or why we even use dollars in the first place.

Dollars exist to enable people to engage in transactions, by enabling all parties to a transaction to agree to the value of goods and services they are actually trading by agreeing to a dollar value as a price for the trade (within the context of an overall budget with which the partners must operate). The dollar value of traded goods and services changes all the time, and can be tracked by trends in the prices that goods and service are exchanged for for in actual transactions which occur every day. Because of the effects of interest and inflation, the values of dollars change over time, and always keep up with changing market conditions, substitutes and costs. By contrast the hypothetical “dollars” used to assess the value of factors that never occur in transactions simply remain the same, or change only when a different group of people gather together to theorize about these hypothetical transactions. There is nothing tying these hypothetical dollar values to actual economic outcomes or stakes among people outside of the stakeholder engagement process. In this way, using “hypothetical dollars” to measure trade-offs in exchange for “real dollars” makes it difficult, if not impossible to understand what kind of practical economic implications may actually occur as a result of investment choices.

Throughout Europe, and increasingly in the United States, multi-criteria analyses offers more defensible and transparent ways to treat intangible (or difficult to isolate and quantify) factors. In multi-criteria analysis, the decision making body (1) estimates an expected investment outcome (either in terms of dollars where possible, or in terms of categorical criteria where dollars are not possible), (2) indexes these quantified outcomes to fall within an internally consistent range and (3) applies normative weights to reflect prevailing public values regarding the desirability of outcomes. For example, under this type of methodology the aesthetic quality of a street resulting from a project may be measured on a scale of zero to five, with specific criteria governing what qualifies for each point. More monetizable outcomes (such as the value of travel time saved) will also then be normalized to fall on a one to five scale based on the range of maximum and minimum project outcomes. Once these values are indexed to a consistent zero to five scale, normative weights can be applied to reflect community values. For example if stakeholder value travel time twice as much as aesthetic quality, the score for travel time will have a multiplier applied. Weighted scores can then be used to sort projects and explain decisions without ever using indefensible dollar estimates for intangible outcomes.

This type of approach can focus the planning process on meaningful discussion about the importance and desirability of all performance outcomes (whether quantifiable in dollar terms or not), without asserting the likelihood of indefensible economic implications that would be suggested by simply imposing unrealistic dollar values to things that cannot be quantified. Whenever considering investment choices, it is important to remember that community values rightly play an important role in decisions. Multi-criteria analysis offers an honest way of incorporating these values by explicitly acknowledging the subjective weights consistently applied to possible outcomes, instead of presenting them in dollar terms (as if they were substantiated by any kind of objective market or economic analysis). US States such as Alaska, Ohio, Oregon and Colorado have had success with this type of approach. For more information about multi-criteria analysis please contact: cduncan@edrgroup.com.

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Guest Thursday, 23 March 2017