Cost Benefit Analysis

Plucked from this poignant post about externalities (which reminds me of my realization that limited liability corporations evolved from pirates)  is this bit from a Rolling Stone article.  It’s a nice clean example of cost benefit analysis in the “real world.”

BP has also cut corners at the expense of its own workers. In 2005, 15 workers were killed and 170 injured after a tower filled with gasoline exploded at a BP refinery in Texas. Investigators found that the company had flouted its own safety procedures and illegally shut off a warning system before the blast. An internal cost-benefit analysis conducted by BP – explicitly based on the children’s tale  The Three Little Pigs – revealed that the oil giant had considered making buildings at the refinery blast-resistant to protect its workers (the pigs) from an explosion (the wolf). BP knew lives were on the line: “If the wolf blows down the house, the piggy is gobbled.” But the company determined it would be cheaper to simply pay off the families of dead pigs.

Billions of years ago, in a course on Biotechnology, I got a A+ for writing a long paper outlining a cost benefit analysis for some research on kidney machines.  I’d written the entire paper in a similar sardonic tongue in cheek tone and I was shocked that the instructor seemed to be oblivious to that.  It was, I thought at the time, the most interesting lesson I took from the course.

I must look for a chance to use the The Three Little Pigs as design framework!

5 thoughts on “Cost Benefit Analysis

  1. Edward Vielmetti

    The whole world does this risk-based approach. You’ll see it in the automobile industry, where the classic case is the Ford Pinto gas tank.

    http://www.autosafety.org/ford-pinto-fuel-fed-fires

    “In 1977, Mark Dowie of Mother Jones Magazine, using documents in the Center files, published an article reporting the dangers of the fuel tank design, and cited internal Ford Motor Company documents that proved that Ford knew of the weakness in the fuel tank before the vehicle was placed on the market but that a cost/benefit study was done which suggested that it would be “cheaper” for Ford to pay liability for burn deaths and injuries rather than modify the fuel tank to prevent the fires in the first place. Dowie showed that Ford owned a patent on a better designed gas tank at that time, but that cost and styling considerations ruled out any changes in the gas tank design of the Pinto.”

  2. bhyde Post author

    Oh, absolutely. And individuals do it in their own lives. It is always a matter of degree. I was unsurprised to learn that the feds have a dollar value for a human life they use in such calculations. I gather it varies from department to department. Such is life. 🙂

    And yet there are particularly unethical cases. The Pinto case, has always seemed to me to be debatable. It all came out much worse then the designers calculated.

  3. mtraven

    Thanks for the link!

    I agree, cost/benefit is widespread, but presenting it in terms of injuries to “the piggies” is something else again. That indicates a pretty alien corporate culture, to me at least.

  4. Ben Hyde

    It is impossible to tell isn’t it. Maybe the authors of that report were using that analogy to make it abundantly clear to their associates that they had no choice but to build the bunker; or maybe not. Note that the fairy tail makes the first two piggy are very clearly sinfully lazy, not thrifty!

  5. goatchowder

    This was explained brilliantly in Fight Club: if the cost of the liability claims is greater than the cost of a recall, then they do a recall, otherwise they don’t. It wasn’t satire, it was reality.

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