what-when-how
In Depth Tutorials and Information
function of information exchange among individuals who are trying to maximize
their proits (Cetin and Baydar, 2004). he main drawback of agent-based model-
ing approaches is that the initial assumptions about an individual's behavior can
predetermine the aggregate systems behavior, making the outcome very sensitive to
the initial assumptions of the system.
2.2.1.5 Benefit-Cost Analysis and Discounted Cash Flow
Benefit-cost analysis (also called cost-benefit analysis) is a methodology developed
by the U.S. Army Corps of Engineers before World War II that allows decision mak-
ers choose projects that produce the greatest net beneit for every dollar spent. his
method has been used to analyze the feasibility of complex large-scale projects by the
public and private sectors. It uses the net present value (NPV) as a basis for decision
making, and is used extensively to this day. he underlying assumption of this type of
analysis is that benefits and costs can be converted easily to monetary benefits and can
be compared across heterogeneous projects. his can be a particularly bad assumption
when dealing with social systems, where benefits are less tangible in monetary terms
and evaluated differently by different stakeholders. Also, the choice of the discount
rate and distributional effects are hard to capture with this methodology.
2.2.1.6 Utility Theory
Utility is an economic concept that realizes that the benefits of a specific good or
service are not uniform across the population. It is a measure of the satisfaction
obtained from gaining goods or services by different individuals. It can comple-
ment benefit-cost analysis by including the decision-maker's preferences as a mea-
sure of comparison of large-scale projects. One of the problems with utility theory
is that people's preferences can change very fast, and often there are conflicting
utilities among the different decision makers and stakeholders, making it difficult
to use a single utility for a course of action or a system outcome.
2.2.1.7 Real-Options Analysis
Real-options analysis is the application of financial option pricing to real assets.
Instead of the now-or-never investment options that are used in a traditional NPV
(Net Present Value) analysis, real-options analysis provides an opportunity but not
an obligation for the decision maker to make use of opportunities that arise under
uncertain conditions. Similar to stock options, the decision maker spends an initial
investment that provides them with an opportunity to act under certain conditions
to improve the value of the system they manage (Amram and Kulatlaika, 1998). A
drawback of the real options analysis is that it depends on a known volatility pro-
file for any given system, something that is a far stretch for most complex systems
where historical data is not necessarily predictive of future behavior.
