PART ONE
               INTRODUCTION TO EVALUATIVE THINKING 
     Psychiatrist to patient:  "Do you find it difficult to make      
decisions?"

     Patient to psychiatrist:  "Yes and no."

     Comparing alternatives is a fundamental activity of human 
life.  A subsistence farmer in Africa or a corporate farmer in 
Minnesota must compare alternative crops in order to decide which 
crop to plant.  A teen-age girl compares two boys who ask her to 
the prom.  The U. S. compares the consequences of invading a 
fractious Central-American nation versus dealing with it in 
another fashion.  We must compare to stay alive, and we compare 
frequently so as to live better, though sometimes we make life 
worse by comparing too often. 
     At the core of every evaluation lies the process of 
comparison.  And the heart of every comparison is a consideration 
of the benefits and costs of each alternative being considered.  
Cost-benefit analysis is the formal apparatus for comparing 
alternatives. 
     Economists like to refer to their discipline as the science 
of choice.  And they often use Lionel Robbins's famous 
definition:  a set of principles for allocating scarce resources 
among competing means. But choice can also be seen more simply, 
as just the selection among alternatives without any explicit 
statement in advance of the resources available to you. 
What Is Cost-Benefit Analysis?

     Cost-benefit analysis is the art of sound decision-making 
for personal, business, and public decisions by systematically 
comparing the goods and the bads that you can expect with various 
alternatives.  Some additional examples of situations in which 
cost-benefit thinking surely is appropriate are: 
     1.  What price should a concert promoter set for tickets to 
a concert?  The price for a lifetime subscription to the Chicago 
Opera?  For a new perfume?  
     2.  Should United Airlines sell its chain of hotels?  Should 
Mariott Corporation buy the Wag's chain of restaurants?
     3.  Should Zebus, Inc. buy the big new computer that it 
needs, or should it rent it instead? 
     4.  Should the federal government place a dam across the 
Colorado River at Happy Canyon? 
     5.  Should athlete Bo Jackson choose to play professional 
football, or baseball, or both?      
     6.  Should the U. S. Public Health Service recommend that 
all persons be vaccinated against smallpox, given that 6 to 9 
persons would die annually from complications associated with 
vaccination, and given that the USPHS estimates that about once 
every twelve years a case of smallpox would be imported from 
abroad?  (New York Times, April 2, 1972, p. 14 E).  Should 
schoolchidren be given annual X-ray examinations if leukemia 
might be caused thereby?  (George Beadle, "Ionizing Radiation and 
the Citizen", Scientific American, September, 1959). 
     7.  What are the implications for health-insurance and 
governmental medical programs if the $10,000 cost of a particular 
type of heart operation -- correction of a left ventricular 
aneurysm -- results in increases in expected income of an average 
of $10,000 within about 1.7 years, and if 70% to 80% of such 
surgical patients remain alive three years later?  (Wall Street 
Journal, August 29, 1980, p. 13). 

The Limits of Cost-Benefit Analysis:  To What is it Applicable?

     Values, ethics, creation of precedents, and complex social 
balances must sometimes enter into the decisionmaking along with 
the monetary costs and benefits.  Among such cases in which 
narrow cost-benefit calculations are relevant, but probably do 
not constitute the entire criterion, are these decisions: 
     1.  Should the federal government ban cigarette advertising 
from magazines and newspapers? 
     2.  Should the local electric utility contribute money to 
the local public radio station? 
     3.  Should Lana go on to college after she graduates from 
high school?  
     4.  Should Filipino physician Anthony migrate to the United 
States?  Filipino lawyer Moreno?  
     In the above four cases, though a narrowly-economic 
calculation would omit key elements of the situation, a wider 
cost-benefit analysis that includes non-monetary costs and 
benefits may be an appropriate aid to decision-making. 
     There are also situations where some may feel that the 
decision-maker should simply "do the right thing" and damn the 
calculations, whereas others may feel that the decision-maker 
should at least know the balance of economic costs and benefits 
as well as consider the ethical elements.  These are some 
examples: 
     1.  Should Molinari Painting fire the bookkeeper who has 
worked for the firm for thirty years but is no longer efficient 
or pleasant? 
     2.  Should a popular magazine accept cigarette advertising?      
     Though the analytic framework of cost-benefit thinking suits 
a wide variety of situations, sometimes it produces results that 
are foolish or worse.  Some decisions are simply a matter of 
taste, and trying to apply cost-benefit analysis obviously would 
be wacky.  For example, one does not explicitly evaluate costs 
and benefits when choosing which Psalm (or none) to read at your 
wedding.  
     There also are situations where cost-benefit analysis can 
cause damage because the most important benefits (or costs) are 
affected by the making of the cost-benefit calculation.  Some 
types of such inappropriate situations are as follows: 
     a) When loyalty and commitment are central.   In a love 
relationship the other person might regard the analysis as 
inappropriate.  ("Do you simply compare having me to having a new 
car?")  If you make a cost-benefit calculation, rather than 
simply acting on the basis of commitment alone, you may alter 
your partner-friend-mate's commitment to you.  It is as if there 
is an implicit agreement not to make cost-benefit calculations, a 
contract of friendship or death-do-us-part, and if one doesn't 
seem to live up to it, as a consequence the other may not, also.  
It is like people together lifting a heavy object; if each cannot 
assume that the other may not slack off, both may falter. 
     Symbolic gestures are a related category of activities which 
are negatively affected by cost-benefit analysis.  If someone 
thinks that you coolly evaluated the personal pro's and con's 
before deciding to say "I'm with you", the meaning of the gesture 
may reduced. 
     b) Ritual behavior, religion being a vivid example.  Should 
you read this prayer or not, observe this sabbath rule or not?  
The religious person suspends such decision-making, perhaps as an 
implicit contract between the person and her/his God, or simply 
as a decision that taken as a whole the body of rules is good.  
Making a cost-benefit analysis of one part or another would be 
inconsistent with the already-made decision to accept the entire 
package. The wholeness of the overall package commitment is a key 
element in the package.     
     c) When the process of decision-making and control is 
inconsistent with the act and its pleasure.  In sexual love, for 
example, the exercise of rationality and studied choice is 
inconsistent with the pleasure of spontaneity, and may even make 
performance impossible.  In the case of music, evaluating a 
symphony is likely to affect how you perceive it, and hence can 
affect your enjoyment.  
     Aside from these categories, however, just about all other 
decision-making seems appropriate for cost-benefit analysis -- 
even life versus death (the decision to commit suicide is a 
straightforward cost-benefit analysis to some terminally-ill 
people), and war versus peace (though the decision is never a 
simple one). 
     Before you enter into a relationship, even decisions about 
such issues as love and faith may appropriately be analysed with 
cost-benefit thinking (though I do not urge it).  Hardheaded 
calculation of benefits and costs may well be called for when 
deciding whether to marry a particular man, or to convert to a 
particular religion and accept its obligations.  It is only after 
one has entered into the relationship that such thinking may be 
inappropriate. 
     (Sometimes prudence might dictate doing your cost-benefit 
analysis discreetly.  A graduate student once proposed doing his 
cost-benefit term-paper on whether to marry the woman he was 
going with.  I suggested changing the topic because each student 
was required to present his project in class, and word might 
reach his woman-friend with distressing results.  He insisted, 
however, on the grounds that she worked in a city 80 miles away, 
and he went ahead with the topic.  His assessment was positive, 
he proposed, and she accepted.  What happened thereafter I know 
not.  With hindsight I still think this was an unsound choice of 
class project, and perhaps as the teacher I should have vetoed it 
-- but on what grounds?  What would you have done in my place?) 
     You should use cost-benefit analysis when making such 
business decisions as how much a firm should spend for 
advertising, rather than using "sales target" or "goal" thinking. 
The latter sort of thinking is usually a lazy replacement for the 
hard work necessary to do a sound cost-benefit analysis.  Don't 
get taken in by the claim that certain kinds of business 
decisions "don't lend themselves" to cost-benefit analysis.      
     Decisions of non-business enterprises are sometimes less 
amenable to cost-benefit thinking.  A non-profit institution such 
as the Catholic Archdiocese of Washington has multiple goals 
rather than the single goal of making as much money as possible, 
and it must answer to a variety of groups and individuals both 
within and without the church; all this makes some decisions more 
complex, and cost-benefit analysis less applicable (though this 
would not be true when the Archdiocese is deciding whether to buy 
versus rent a computer).  Non-profit institutions also may find 
it difficult to measure and value the resources which they use, 
and the goods and services which they provide. 
     Individuals' life decisions typically are the most complex, 
because elements of cost-benefit analysis that can be objectively 
measured by a firm or even by a non-profit institution -- the 
rate at which future events are to be discounted, for example, 
and the non-income value of a college education -- must be 
specified by the individual on the basis of personal taste and 
judgment.  
     The limits of cost-benefit thinking will be discussed at 
more length in Chapters 00.     
     These are the steps in a cost-benefit analysis:       1.  
Identify the consequences of the given action in each period in 
the future.  
     2) Classify the consequences into positive and negative -- 
goods and bads, incomes and outgoes, costs and revenues -- and 
state each of them numerically.  If a consequence is uncertain, 
state it as a probability.  
     3) Apply an appropriate weight to each individual 
consequence.  The weights will be different for different time 
periods. 
     4. Combine the weighted consequences for the given 
alternative into a single summary number -- the "present value."
     5. Compare the summary number for the various alternatives 
being considered, and choose that alternative that has the 
highest present value. 
     The chapters that follow discuss in detail how these steps 
are executed.
     Please do not conclude from the neat, orderly look of this 
set of steps that most evaluative thinking follows this model.  
Most judgments are snap decisions without formal analysis.  The 
decision-maker somehow consults her or his "intuition" -- a 
seemingly-mysterious brew of accumulated mental material which 
actually is neither mysterious nor "irrational"1 -- and quickly arrives at an 
answer.  
     Indeed, there formal cost-benefit analysis in only a tiny fraction of the decisions we make; the process costs too much time 
and thought.  Systematically working down the series of steps must be reserved for the tough decisions when intuitive thinking 
seems inconclusive, or when the decision-maker asks someone to perform a formal analysis as a check.  
     Making good intuitive decisions about when you need to, and do not need to, make formal cost-benefit decisions is a valuable 
skill.  It follows that bright young-punk graduates often err grievously in their contempt for higher-level managers who do not 
often bother with fancy analytic techniques.  It also follows that experienced managers should not be so cock-sure of the results 
of their intuition that they scorn a formal analysis of the important decisions. 
     If we could record the lightning-quick operations that occur inside our heads when we think "intuitively", we probably would 
be able to deduce a series of controlling instructions analogous to the program of a computer engaged in what is called 
"artificial intelligence" -- say, a program that develops a medical diagnosis and treatment for a patient with a complex and 
exotic disease.  From the outside the computer looks mysterious, but inside the black box, the operations are quite logical and 
unmysterious. 
     The information used in cost-benefit analysis is always imprecise, sometimes ridiculously crude.  And the more important the 
decision, the less reliable is the information that is likely to be available, because very important decisions arise 
infrequently.  The machinery provided later for dealing with uncertainty helps us deal with lack of information.  Yet imprecision 
necessarily remains. 
     Our desires and goals also are imprecise and often muddled.  Sometimes it seems as if we first make our decisions, and only 
afterwards decide which goals fit the decisions.       The messiness of decision-making is not a sound reason to forswear cost-
benefit analysis, however, anymore than the complexity of human relations is a reason to be a hermit.      
     Careful and imaginative cost-benefit thinking often reveals conclusions quite opposite to "common sense".  For example, at 
first thought it makes sense that vaccinating all children in the United States against smallpox is good.  But vaccination 
programs across the U. S. typically resulted in 6 to 9 fatalities each year, plus 400 to 500 "serious complications".  And the U. 
S. did not suffer any cases of smallpox from 1949 to 1971.  Hence the U. S. Public Health Service recommended in 1971 that routine 
smallpox vaccination be ended.[New York Times, April 2, 1972, p. 14E). An analysis of laws requiring use of recycled paper also 
shows that the activity is not economically positive on balance, even though "common sense" suggests that it would be. 
     Cost-benefit analysis is not the whole of managerial thinking, by a long shot.  Developing the ideas for alternatives to 
evaluate is a crucial element, of course, and must be discussed separately (Chapter 00).  Nor is cost-benefit analysis usually 
equivalent to problem-solving (discussed in Part II).  Much managerial energy goes into fitting together the resources of an 
organization -- both the people and the physical assets -- so that they will meet particular needs and accomplish particular 
goals.  An example is scheduling the operations in constructing a skyscraper.  This sort of problem-solving is a matter of 
techniques rather than evaluation, more akin to engineering rather than to business.  The book begins with cost-benefit analysis 
because the principles are particularly clear and the methods are generally applicable.   
     You may say to yourself:  Hey, I'm interested in learning about thinking in general, and not in managerial thinking or 
scientific thinking or any other specific techniques.  Truth is, however, that there is no such thing as clear and powerful 
thinking apart from techniques, any more than one can be a clear-minded builder of houses without knowing the techniques of 
cutting, joining, transporting, supporting, and so on.  A large part of thinking is choosing and deploying the available mental 
tools.  And the set of tools presented in this book is as general a set as there is, all of them applicable to a wide range of 
human activities. 
     The following chapters consider a series of problems encountered in cost-benefit analysis, plus solutions for the problems.  
The inter-relatedness of activities is one cause of difficulty.  Chapter 1 shows how the tool of tabular analysis and the 
consideration of each combination of activities handles the difficulty of inter-relatedness.  The spreading-out of consequences 
over time also causes difficulty in decision-making.  The mechanism of time-discounting and present-value calculation, discussed 
in Chapter 2, deals with that difficulty.  Then there are pitfalls in dealing with cost.  Chapter 3 points out the pitfalls, and 
provides a surefire simple framework that avoids the cost pitfalls and leads to sound decisions.  Uncertainty is a third major 
cause of difficulty in decision-making.  Chapter 4 presents the intellectual machinery which enables you to deal with uncertainty 
in a systematic fashion.  And Chapter 5 provides a set of devices that helps you allow for risk in your decision-making.  The 
presence of more than one goal, and conflicts in goals and preferences among the participants in an organization, or within an 
individual, are another source of difficulty in decision-making.  Chapter 6 shows ways of handling that difficulty. 



                            EXERCISE

     Muhammad Ali's decision not to go into the army.  Compare to going in and not fighting, giving boxing exhibitions.  Benefits 
of not making decision spontaneously, without calculation. 

                            FOOTNOTE

     1The concept of intuition deserves demystifying.  At the present state of science, we do not know what goes on in any 
particular intuitive state.  It is probably a rapid selective cycling and recycling through the above series of steps, together 
with various processes of gathering information and ideas from one's memory and applying values to them, done so fast that we 
cannot have a clear record of what is happening.  To put it differently, intuition is the rapid and unsystematic employment of 
selected aspects of the various thinking processes described in this book, plus some others that are not in the book.  Daniel 
Isenberg in "How Senior Managers Think", in David E. Bell, Howard Raiffa, and Amos Twersky, Decision making (sic), New York: 
Cambridge U. P., 1988, 525-539) distinguishes five functions for the rapid unsystematic process we call "intuition": 1) "[S]ense 
when a problem exists".  2) "[P]erform well-learned behavior patterns rapidly", for example, to run through a checklist of causes 
why the equipment broke down.  3) "[S]ynthesize isolated bits of data and experience into an integrated picture", that is, to make 
a set of connections.  4) "[A] check...on the results of more rational analysis", that is, to examine the conclusions of formal 
studies in the light of one's general experience.  And 5) "[B]ypass in-depth analysis and move rapidly to come up with a plausible 
solution", the process which this section focuses upon (pp. 530-1.).  
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