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Methods for Decision-Making
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Financial Decision Making for Municipal Governments
Познакомьтесь с преподавателями
Somesh SharmaExpert, Environment and Sustainable Development Planning
Institute for Housing and Urban Development Studies (IHS)
Jaap SpronkProfessor of Financial Management Science
RSM
Meine Pieter van DijkProfessor of Urban Management in Emerging Economies
IHS
Bernadette SsanyuVisiting Lecturer
Welcome back. We now turn to
the different types of methods to take account for goals and constraints.
In this video, I will briefly introduce four popular classes of decision making methods.
After this video, you will be able to identify
right approaches for your decision in a particular context.
It will help you consolidate and apply
all the concepts that you have learnt in this module.
Literature on all of the methods discussed within this video can be
found in the reading following this video.
The first class of methods are the so-called Monetary Methods.
Therefore, each alternatives and all scores are translated into monetary units.
Some plus, some minus,
summed up for each alternative and discarded.
These methods are well-known in economics and it includes
the famous procedures like Cost-Benefit Analysis and Cost-Effectiveness Analysis.
It should be noted, however,
that using these tools,
the criteria you are including must be translated into monetary terms.
The criteria you are using must be translated into monetary terms.
The second method is the Expected Value Method.
That means that the attributes, criteria,
goals, or variables are assigned weights.
When you use the expected method,
you are essentially using linear weights.
So you can say employment is three times as important as economic growth, for example.
It's very important to realize that these are linear weights,
so you really have to know what are the weights in which
units are measured and whether the rates in which they apply,
these linear weights, remain valuable.
Weights will depend on the situation.
When you are in a situation of extreme poverty,
then the weights may be different than in a case where you are in average situation,
or in a very affluent society.
We assume linearity, the weights can only apply to a very specific situation.
The two types of methods is using Utility Functions.
The preference of the decision making are
modeled via mathematical functions of the criteria value scores.
And it gives you the possibility to formulate,
to take account of non-linearity, to say, "Well,
in that situation, my tradeoff is different than in the early situation."
This has been a long-tradition economics and
extensions that originated in the second half of the 20th century.
And that includes approaches that are valid in situation of uncertainty.
Keeney and Raiffa are the names there.
The fourth class of methods is the largest.
It is the class I have be working in a lot,
the class of Multi Criteria Methods,
sometimes Multiple Criteria Decision Methods.
These methods normally assume much
less with respect to the preference of the decision makers.
In the utility approach,
decision makers often have to answer all kinds of very difficult questions.
How can you define your preference utilities in any type of
hypothetical situation that might be achievable and
might even be not very well thinkable?
So what would be your chosen if that and that happens.
So, but very difficult questions,
but Multi Criteria Methods assume less.
On the other hand,
they normally promised less than the other classes of methods.
Fortunately, in Multi Criteria Analysis,
there is a large supply of methods that are based on the impact matrix.
Often, these methods make much less stringent assumption with respect to preferences,
and also many of these methods are formulated or structured in
a way that you can answer preference question while you make the analysis.
So some of these methods I have also been working on, interactive methods.
You'll get concrete choices.
You have to answer that you can answer,
what you can answer, and if you don't have to answer when you cannot answer.
But when you can answer,
the method produces another solution.
You can then, based on a new solution, answer again.
And so, you answer a solution,
a new question to you and so on.
You can steer and learn about your preferences while you are
going through the choice process.
I would like to mention what you can expect from these methods.
Of course, the more you assume about your behavior,
about your behavior and the preference of stakeholders,
the more guarantees methods provides and vice versa.
In fact, you can make a ranking of what you can expect.
For me, the most important benefit of using these kinds of
methods supporting decision is that they
help you to clarify and structure the decision problem.
It's also like a notebook by which you can communicate with others.
Don't expect wonders, but structuring and getting a list of what
the effects are and what it might be is I think crucial.
A good, well-thought through impact matrix is essential.
Like in the risk analysis discussed before,
it's important to know there are options.
It's important to know there are games.
It's even better way to know the effects of
these options and games and even can value them.
But the situation is simply not always clear
enough and structured enough to get precise number.
So realizing what's happening is really a good first step.
When you are looking, you can use these methods by discovering,
for instance, that in your case,
there are dominant solution you can limit your analysis to,
throughout a number of solutions that are relevant.
We have used the case of constraints.
If the situation includes clear constraints,
they can help you to reduce a set of alternative.
With less alternative, your analysis becomes easier.
And other useful concept is the concept of Pareto Optimality.
Pareto was an Italian-French social economist.
Pareto Optimality, which can also be used when you have a variety of criteria.
Pareto Optimal Solutions are decision alternative for
which you cannot find a solution with a better value of
any of the criteria without getting a worst value on one or some of the other criteria.
Once again, Pareto Optimal Solutions
are solutions for which you cannot find a solution with
a better value or any of the criteria without getting
a worst value or one or some of the other criteria.
When you accept this principle of Pareto Optimality,
you can limit your analysis to
Pareto Optimal decision alternative
because they dominate all the other decisions alternatives.
Two beautiful concept to reduce a set of alternatives,
hard constraints and Pareto Optimality.
In some cases, Multi Criteria Methods deliver partial orderings decision alternatives,
and partial ordering can be nice.
Let's say you have three decision alternatives and
a decision maker says that A is better than B,
and A is better than C. He or
she does not say anything about the ordering between B and C,
but when you know that A is better than B,
and A is better than C,
you can already choose for A.
It dominates the others. So it's a partial ordering but it helps you to decide.
The best, and let's say academically speaking,
the Valhalla is the complete ordering.
When you have the A, B, C, D, E,
you can say A is better than C and C is better than E and E is better than F,
F is, a complete ranking.
You get the complete story.
Nice, for instance, delivered by a cost-benefit analysis.
But that's complete ordering and that nice looking answer comes at
a price of the assumption of complete monetary description of our problem,
which is not always or rather often not realistic.
And then again, a health warning.
You have to realize that when you use methods,
it all looks very nice,
academic and scientific, and people put it in nice reports with well,
one zillion different colors.
But be aware, that a lot of these studies are also used and misused
actually to motivate and support decision that already that been made.
I've seen this many cases of those in both private and in the public sector.
A decision which may not be the best,
but has a lot of political leverage is then supported by reports with
a lot of assumptions and unclarified details supporting the decision.
So be aware of that as well.
Be critical and look at the assumption behind the results.
As this is the last time you will see me in this MOOC,
I would like to thank you for watching and I hope you have
enjoyed these videos discussing financial decision making for municipal governments.
In the final video of this module,
my colleague and friend Aloysius,
will provide key take away messages from this week.
Thanks again and arrivederci.
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