Risk-opportunity analysis (ROA) is a generalization of cost-benefit analysis (CBA) appropriate for use in contexts where change is structural, important outcomes are uncertain, and diverse interests are affected.
This is important because CBA is a marginal analysis technique generally only appropriate when economic structures can be assumed to be unchanged by the intervention. While ROA does not provide simple and definitive answers about which course of action is the best, it is useful precisely when complexity and uncertainty mean that no simple answers exist.
- First, a dynamic assessment is made of a policy’s effect on the processes of change as well as expected outcomes at specified moments in time (CBA only does the latter). Systems mapping can be used to first understand the dynamics of the economic system of interest and then assess whether a policy will likely be selfamplifying or self-limiting in this context. To quantify the dynamics, system dynamics or agent-based models can be used.
- Second, a multi-dimensional assessment is conducted, which avoids collapsing all the outcomes into one metric. This preserves the integrity of information relating to diverse actors, interests, and policy outcomes, and avoids making arbitrary choices and implicit assumptions concerning the relative value of outcomes in different dimensions. Whether policy objectives are primarily concerned with the expected, worst-case, or best-case outcome should also be considered.
- Third, an uncertainty assessment is carried out that considers how policy outcomes may be affected by factors outside the control of the decision-maker. Scenario analysis can help to this end.
Once these three stages have been completed, policy options can be compared in terms of their expected, worstcase, or best-case outcomes in different dimensions, their dynamic effects (i.e., whether the policy is likely to be self-reinforcing or self-limiting), and their performance (robustness, resilience, or contingency) under uncertainty. The greatest challenge in applying ROA lies in bringing together high quality subject-specific knowledge, which the analysis crucially depends on. While detailed quantitative modeling results can be an input into ROA, use of such models is not essential on every occasion.
Keywords
combining approachesmethodologiesmodelsrisk-opportunity analysisuncertainty
