Common Misperceptions of Cost/Benefit Analysis for Public and Private Decision Making

1. Common Misperceptions of Cost/Benefit Analysis for Public and Private Decision Making Cristina McLaughlin U.S. Food and Drug Administration, College Park, Maryland, USA • The views in this presentation are my own and do not reflect any official position of the US FDA or the US Department of Health and Human Services

2. Cost Benefit Analysis Is a tool that helps inform decision making. • Measures the well being of society resulting from policy decisions or public investment. • Uses monetary measures as a metric for measuring societal welfare. • The monetary measure helps identify the magnitude of a problem and its proposed solutions.

3. Common misperceptions regarding using CB analysis in policy decisions • Cost effectiveness analysis should be used instead of cost benefit analysis • CB analysis leads to unfair decisions • Not useful because it deals with limited information • Objection to quantifying benefits • Often blamed for bad policy outcomes • Problem understanding Discounting

4. Cost effectiveness analysis instead of CB analysis? • Cost effectiveness is not a substitute for CBA. • CE helps determine the least cost option of pre determined target or policy goals. • Cost benefit • Characterization of potential trade-offs of policy decisions. • Addresses market responses to policy choices including changes in producer/consumer response. • Countervailing risks. • Changes in exposure. • Subpopulation risk

5. Does it really lead to unfair decisions instead of decisions that are based on generosity and fairness? • True, CB analysis is not always fair • Using CB analysis in a policy decision is like using a mediator or a broker to promote bargaining by simply bringing costs and benefits to the decision making table at the same time.

6. CB is not useful because it deals with limited information • Limited information is not a problem unique to Cost Benefit Analysis. • Designing a quantitative risk assessment often deals with limited information as well • In light of limited information it is more desirable to conduct and integrate both in order to make better decisions

7. Objection to quantifying benefits or trading health for cash • In reality everyone makes this tradeoff in everyday decision making • Otherwise we would do things like have our breaks checked everyday, but most of us don’t. • Some pay more for additional safety features in a car but not everyone does.

8. Often blamed for bad policy outcomes • True, CB and other types of analyses can easily be manipulated to fit political pursuits, even altruistic ones. • More transparency in policy formulation and the peer review process in CB and other studies is very important.

9. Discounting: Often mistaken as “devaluing” human life • Discounting helps evaluate and compare costs and benefits of policy decision that happen over a period of time. • Current consumption is more expensive than future consumption. • Discounting will help determine if resources are being misallocated over time. • Required by E.O. 12866 • For more information go to http://www.whitehouse.gov/omb/circulars/a004/a-4.html#d

10. Napoleonic tactics in the American Civil War • Deeply influenced decisions by famous generals including Lee, Grant, Sherman and Jackson • Did not account for changes in technology • mainly the .58 caliber long range infantry rifle • Changes in technology rendered Napoleonic tactics obsolete. • 50 years after Napoleon • Disastrous results during the American Civil War • 158,000 deaths in first 6 battles.

11. Thank you