A practical multicriteria methodology for assessing risky public investments
(2000) Socio-Economic Planning Sciences — Vol. 34, p. 121-139 (2000)
Files
document.pdf
Restricted Access - Adobe PDF
- 1.31 MB
Details
- Authors
- Abstract
- (fr) This paper proposes a simple, practical but also realistic, methodology of multicriteria decision aid for the assessment of public investment projects which takes into account the uncertainty of projects' measures. It follows the general framework of the expected utility developed by von Neumann and Morgenstern and its operational modelling by an additive non-linear function proposed by Keeney and Raiffa. However, it builds upon the linear goal programming model of Jacquet-Lagrèze and Siskos which offers several convenient computational procedures for building non-linear (albeit, piecewise linear) partial utility functions reflecting, as well as possible, the decision-maker's preferences. In order to simplify as much as possible the process of decision making, the paper proposes an alternative method, named Quasi-UTA, whereby the decision maker chooses directly for each criterion a (piecewise linear) partial utility function with only two parameters. These are the respective relative weights and a curvature parameter that models risk aversion or proneness. The method substantially reduces the number of questions to be answered by the decision-maker. In a context of budget constraint, the paper seeks to calibrate the utility function in equivalent money value, and shows how to compute such a value in multicriteria analysis. Money valuation has the advantage of permitting the use of standard financial rules of assessment. The paper also shows how to compute the cost of a project's uncertainty, i.e. its risk premium, as proposed in the financial theory of risk. The method also suggests a procedure to generate and compute each criterion's random distribution as a triangular, rectangular or discrete function. An example illustrates the use of the methodology.
- Affiliations
Louvain School of Management Accounting & Finance
Citations
Beuthe, M., Scannella, G., & Eeckhoudt, L. (2000). A practical multicriteria methodology for assessing risky public investments. Socio-Economic Planning Sciences, 34, 121-139. https://doi.org/10.1016/S0038-0121(99)00021-X (Original work published 2000)