Survival in nature requires cost effectiveness. There is no free lunch for anything living. Resources must be expended in the effort to get the resources necessary for survival.
Consider the Hungry Lion
Consider the hungry lion who decides he wants rabbits for dinner. Rabbits are pretty fast. They also tend to have holes in ground where they can disappear. Even after expending a great amount of energy to catch a rabbit, the lion is still hungry. But now he is also tired.
He failed to do a proper cost benefit analysis on the energy economics of hunting rabbits. As the expression goes, “the juice wasn’t worth the squeeze.”
So then decides that elephants would be much easier to catch. Here the problem is what he will do with the elephant once he catches it. There is a great danger that he could be injured and it is unlikely he could prevail against so large an animal.
He again failed to do a proper cost benefit analysis on the risks in hunting elephants. If he had, it would have been clear that the possible cost vastly exceeded the any potential benefit.
So what is he to do? Well, nature has evolved the lion to be a cost efficient hunter of gazelles. That, however, doesn’t mean that every hunt will be successful. It turns out that gazelles have a vested interest in the outcome too. Lions, however, will be successful enough to survive assuming they do the proper cost benefit analysis and stay away from rabbits and elephants.
For what happens if they are not? They will perish. The law of the jungle brutally enforces the dictate that requires the “survival of the cost effective.”
Cost Benefit Analysis
Cost benefit analysis (CBA) is simply a comparison of costs and benefits. CBA is a decision support process. Usually cost and benefits are considered for more than one alternative to achieving a stated objective. The lion’s CBA would have considered three alternatives: rabbits, elephants, and gazelles.
The costing for CBA is developed to support that specific analysis. It wouldn’t make sense to build an entire accounting system to support a single analysis. So the costing tends to be ad hoc: that is to say “for this.” Sometimes the cost history is not available and estimates will be used.
Benefits often require even more estimation as they are typically unclear and may be risky.
It could be said that every decision made by a rational person implicitly follows a CBA process. Your decision to spend time reading this paragraph cost you something and if you continue past this point you must also think there is a benefit greater than the cost.
You probably didn’t spend a lot of time coming to that decision. You could have done a written and very formal CBA. You didn’t. You could have invested time researching costs and benefits. You didn’t. It turns out that you were doing a CBA on the CBA. You thought the decision small enough that you relied on a gross estimate.
Formal CBAs are done infrequently and only when the decision is important enough to justify the effort. I was part of the U.S Army’s development and institutionalization of a formal CBA process that is extremely effective for its major decisions and will write about this is a forthcoming blog.
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