2 X 2 diagrams are useful and clarifying and encountered for lots of choice scenarios; Pascal's wager and the Prisoners' dilemma are examples. In the case of CBA, the big question is "whose costs and benefits are we talking about." If the answer is "social costs and benefits," unless the gap is completely large and obvious to just about everyone, the notion of CBA is more misleading than helpful.
Yes, this is a point worth making--or (I hope) worth reminding people to consider. But for anyone claiming any sort of logical understanding of costs and benefits, this should be OBVIOUS.
But I suppose we do need to remind people (dummies?) of this, and--more fundamentally--that all benefits have costs (and trade-offs, consequences, etc.).
Some advice I give to husbands if they ask for it: If your wife puts a high benefit on something that you can provide at a low cost, do it.
I applied this principle for years (before we got our Nespresso.) I would go to Starbucks on mornings that I didn't have an early class and get my wife her latte.
“You could expand the diagram to include “Sky High” and “Rock Bottom” entries, which would be helpful for explaining why my favorite policy reforms remain prudent even if all of my critics’ complaints are true.”
No, the word “prudent” is incorrect in the above.
Even if we accepted Brian’s presumed answer of “High” for costs and “Sky High” for benefits of Open Borders.
I.e. because even if the expected value of such a choice were positive - indeed very positive - the *risk* that it would not be positive but actually negative is sufficiently high that *prudent* would be an incorrect word.
Even if those who lean towards Bryan’s position would claim that “imprudent” would also be an incorrect description.
So that policy would still properly get a “Maybe?” In any such diagram.
Of course, High Skill immigration would be the bottom most left “Duh, of course!”
And more *Legal Immigration* (short of open borders, and under the assumption that illegal immigration has been permanently quelled) would also be in the “Do It” camp of low costs and high benefits.
In software development typically both axes are ordered the opposite way. Benefits go from low to high, costs go from high to low. Upper right quadrant is the no brainer do it.
I’m working on electricity policy that has these features: zero public cost and potentially high benefits. I’m continually astonished that many overlook that and still push back.
Change the table so the top right is “Do it!”. That’s consistent with the way most such tables are constructed.
The problem is the counterexamples means pro social behavior never gets done and we turn into China culturally as things like helping ones fellow man fall under "don't do it" as the downside risk ALWAYS trumps the individual benefits. Even something as trivial as "should I help an old lady cross the street" carries the downside risk of death with an upside benefit of "none".
You do things because you SHOULD do them, they need to get done. Not because of the benefits nor the risks. You run into the burning building to save your only kid, you don't just start planning the funeral wall toasting marshmallows and get to working on making a new one with the wife while the ashes cool.
i.e. cost benefit analysis work for things that are, I forget if it was you or your counterpart that coined it, "strong believed, weakly held", i.e. things that don't really matter objectively to you.
Maybe useful in a public policy / macro class but at the individual level, not so much I'd say and I think that distinction is important because it's lost on many people, especially technocrats.
Revealed preference shows that you are wrong. If I run into a burning building to save my child (which I hope I would), it means I value my child my than myself. So it, in fact, does pass the cost benefit analysis. The cost is maybe my life, the benefit is my child's life. Easy Do It!
Same for helping an old lady across the street. The benefit may be something like "I feel good about myself" while the cost is a tiny chance of getting hit by a car. Once again, an easy Do It!
Nah, that fails because it's the utilitarian problem when you consider "my happiness is worth infinite hence everything I do is moral". The chart is supposed to be objective and when doing risk based decision making you always have to go with the worst case being successful as that is the low bar, i.e. that cost and benefits are tempered by probability but when one is "death", it basically goes to infinite bad because the smallest probability*infinite bad is still infinite hence any decision that COULD end in death, without a high benefit, means you shouldn't do it as the downside risk it too much. It's irrelevant how small a chance of you getting hit by a car is when helping the old lady cross the street, the fact is it's non-zero whereas your expected benefit is effectively zero. Now sure that might change if the benefit was "life changing monetary reward for doing so" but that isn't 99.9....9% of polite cases. Prisons are full of helpful people because sometimes lightning does strike.
But there are a couple of serious problems with this diagram.
First, one confronts multiple opportunities to earn benefits by bearing costs simultaneously, so the problem isn't just to pounce on an opportunity when the benefits exceed the costs. One wants to "Do it!" only when the expected differential between discounted benefits and discounted costs (i.e. the expected present value of the opportunity) is maximized relative to all the other available opportunities.
Second, rational cost/benefit calculations _require_ profit-and-loss motivated entrepreneurs making decisions in the context of competitively-generated market prices. An entrepreneur's task is to mobilize one's (possibly unique) knowledge to anticipate how future prices might differ from present prices and how conditions of production might change over time, and to correct errors in prior decisions as profits or losses emerge from them. The ability to correctly quantify costs and benefits across a vast array of conceivable opportunities, to mobilize decentralized knowledge, and to correct errors in decisions are all essential to the integrity of cost/benefit decision-making.
The advice should always be "Don't do it!" whenever these requirements are breached. If there is no competitive process for generating prices, or if the decision-maker is not influenced by whatever profits or losses will arise from their decisions, the decision-making process will be deeply compromised. Of course that's not what the public policy wonks want to hear, but it is the truth.
Too obvious to post.
If we’re talking about government action, the costs are borne by someone else and the benefits are imaginary. That diagram would give me agita.
2 X 2 diagrams are useful and clarifying and encountered for lots of choice scenarios; Pascal's wager and the Prisoners' dilemma are examples. In the case of CBA, the big question is "whose costs and benefits are we talking about." If the answer is "social costs and benefits," unless the gap is completely large and obvious to just about everyone, the notion of CBA is more misleading than helpful.
Bryan, are you writing "Economics for Dummies"?
Yes, this is a point worth making--or (I hope) worth reminding people to consider. But for anyone claiming any sort of logical understanding of costs and benefits, this should be OBVIOUS.
But I suppose we do need to remind people (dummies?) of this, and--more fundamentally--that all benefits have costs (and trade-offs, consequences, etc.).
Some advice I give to husbands if they ask for it: If your wife puts a high benefit on something that you can provide at a low cost, do it.
I applied this principle for years (before we got our Nespresso.) I would go to Starbucks on mornings that I didn't have an early class and get my wife her latte.
Most ignore the cost side of the equation
“You could expand the diagram to include “Sky High” and “Rock Bottom” entries, which would be helpful for explaining why my favorite policy reforms remain prudent even if all of my critics’ complaints are true.”
No, the word “prudent” is incorrect in the above.
Even if we accepted Brian’s presumed answer of “High” for costs and “Sky High” for benefits of Open Borders.
I.e. because even if the expected value of such a choice were positive - indeed very positive - the *risk* that it would not be positive but actually negative is sufficiently high that *prudent* would be an incorrect word.
Even if those who lean towards Bryan’s position would claim that “imprudent” would also be an incorrect description.
So that policy would still properly get a “Maybe?” In any such diagram.
Of course, High Skill immigration would be the bottom most left “Duh, of course!”
And more *Legal Immigration* (short of open borders, and under the assumption that illegal immigration has been permanently quelled) would also be in the “Do It” camp of low costs and high benefits.
Businesses use some version of this all the time in risk assessment strategy! (with different language)
In software development typically both axes are ordered the opposite way. Benefits go from low to high, costs go from high to low. Upper right quadrant is the no brainer do it.
I’m working on electricity policy that has these features: zero public cost and potentially high benefits. I’m continually astonished that many overlook that and still push back.
Change the table so the top right is “Do it!”. That’s consistent with the way most such tables are constructed.
The problem is the counterexamples means pro social behavior never gets done and we turn into China culturally as things like helping ones fellow man fall under "don't do it" as the downside risk ALWAYS trumps the individual benefits. Even something as trivial as "should I help an old lady cross the street" carries the downside risk of death with an upside benefit of "none".
You do things because you SHOULD do them, they need to get done. Not because of the benefits nor the risks. You run into the burning building to save your only kid, you don't just start planning the funeral wall toasting marshmallows and get to working on making a new one with the wife while the ashes cool.
i.e. cost benefit analysis work for things that are, I forget if it was you or your counterpart that coined it, "strong believed, weakly held", i.e. things that don't really matter objectively to you.
Maybe useful in a public policy / macro class but at the individual level, not so much I'd say and I think that distinction is important because it's lost on many people, especially technocrats.
Revealed preference shows that you are wrong. If I run into a burning building to save my child (which I hope I would), it means I value my child my than myself. So it, in fact, does pass the cost benefit analysis. The cost is maybe my life, the benefit is my child's life. Easy Do It!
Same for helping an old lady across the street. The benefit may be something like "I feel good about myself" while the cost is a tiny chance of getting hit by a car. Once again, an easy Do It!
Nah, that fails because it's the utilitarian problem when you consider "my happiness is worth infinite hence everything I do is moral". The chart is supposed to be objective and when doing risk based decision making you always have to go with the worst case being successful as that is the low bar, i.e. that cost and benefits are tempered by probability but when one is "death", it basically goes to infinite bad because the smallest probability*infinite bad is still infinite hence any decision that COULD end in death, without a high benefit, means you shouldn't do it as the downside risk it too much. It's irrelevant how small a chance of you getting hit by a car is when helping the old lady cross the street, the fact is it's non-zero whereas your expected benefit is effectively zero. Now sure that might change if the benefit was "life changing monetary reward for doing so" but that isn't 99.9....9% of polite cases. Prisons are full of helpful people because sometimes lightning does strike.
But there are a couple of serious problems with this diagram.
First, one confronts multiple opportunities to earn benefits by bearing costs simultaneously, so the problem isn't just to pounce on an opportunity when the benefits exceed the costs. One wants to "Do it!" only when the expected differential between discounted benefits and discounted costs (i.e. the expected present value of the opportunity) is maximized relative to all the other available opportunities.
Second, rational cost/benefit calculations _require_ profit-and-loss motivated entrepreneurs making decisions in the context of competitively-generated market prices. An entrepreneur's task is to mobilize one's (possibly unique) knowledge to anticipate how future prices might differ from present prices and how conditions of production might change over time, and to correct errors in prior decisions as profits or losses emerge from them. The ability to correctly quantify costs and benefits across a vast array of conceivable opportunities, to mobilize decentralized knowledge, and to correct errors in decisions are all essential to the integrity of cost/benefit decision-making.
The advice should always be "Don't do it!" whenever these requirements are breached. If there is no competitive process for generating prices, or if the decision-maker is not influenced by whatever profits or losses will arise from their decisions, the decision-making process will be deeply compromised. Of course that's not what the public policy wonks want to hear, but it is the truth.
Tell me you've never worked in the private sector... this diagram is literally how every firm does ballpark prioritization of initiatives.
Also useful for things like Probability versus Impact.