Caveats, Assumptions, and Dangers


  1. Garbage in Garbage out. Bad assumptions can distort analysis.
  2. Who ARE the stakeholders?1
  3. Externalities. Easy to omit side-effects.
  4. Easy to forget to pay attention to what's happening at the margin — we focus on the total and don't notice that a little more investment might provide lots of benefit.
  5. Estimation of costs and benefits is hard.
    • Intangibles hard to value
    • Opportunity costs distorted by availability
    • Opportunity costs easy to miss.
    • Claimed willingness-to-pay may be unreliable
    • Mixed (high/low) mis-estimates can totally muddy output. Important to slant all assumptions in same direction.
  6. Distributional effects DO matter, but in its traditional form, benefit-cost analysis does not address distributional issues.
  7. Dangers
    • Carelessness
    • Naivete
    • Deception
    • False impressions of precision and objectivity

Best Practices to Meet Challenges

  1. Explore unexpected side-effects
  2. Look for sensitive dependence on assumptions
  3. Structure process so that finer analysis can be performed as better information becomes available.
  4. Advice
    • Use willingness-to-pay, if even only as a thought experiment
    • Defer pricing intangibles until late in process.