Undervaluing Diversification: Optimizing for highest Benefit-Cost ratios will systematically undervalue diversification, especially when the analyses are performed individually, instead of as part of a portfolio-building process.
Example 1: Investing in 100 projects to distribute bed-nets correlates the variance of outcomes in ways that might be sub-optimal, even if they are the single best project type. The consequent fragility of the optimized system has various issues, such as increased difficulty embracing new intervention types, or the possibility that the single “best” intervention is actually found to be sub-optimal (or harmful,) destroying the reputation of those who optimized for it exclusively, etc.
Example 2: The least expensive way to mitigate many problems is to concentrate risks or harms. For example, on cost-benefit grounds, the best site for a factory is the industrial areas, not the residential areas. This means that the risks of fires, cross-contamination, and knock-on-effects of any accidents increase because they are concentrated in small areas. Spreading out the factories somewhat will reduce this risk, but the risk externality is a function of the collective decision to pick the lowest cost areas, not any one cost-benefit analysis.
Additional concern: Optimizing for low social costs as measured by economic methods will involve pushing costs on the poorest people, because they typically have the lowest value-to-avoid-harm.
Undervaluing Diversification: Optimizing for highest Benefit-Cost ratios will systematically undervalue diversification, especially when the analyses are performed individually, instead of as part of a portfolio-building process.
Example 1: Investing in 100 projects to distribute bed-nets correlates the variance of outcomes in ways that might be sub-optimal, even if they are the single best project type. The consequent fragility of the optimized system has various issues, such as increased difficulty embracing new intervention types, or the possibility that the single “best” intervention is actually found to be sub-optimal (or harmful,) destroying the reputation of those who optimized for it exclusively, etc.
Example 2: The least expensive way to mitigate many problems is to concentrate risks or harms. For example, on cost-benefit grounds, the best site for a factory is the industrial areas, not the residential areas. This means that the risks of fires, cross-contamination, and knock-on-effects of any accidents increase because they are concentrated in small areas. Spreading out the factories somewhat will reduce this risk, but the risk externality is a function of the collective decision to pick the lowest cost areas, not any one cost-benefit analysis.
Additional concern: Optimizing for low social costs as measured by economic methods will involve pushing costs on the poorest people, because they typically have the lowest value-to-avoid-harm.