ARTICLE IN PRESS

Int. J. Production Economics 100 (2006) 10–29

www.elsevier.com/locate/ijpe

MCDM in a fuzzy setting: Investment projects

assessment application
L. Dimovaa, P. Sevastianova, D. Sevastianovb,,1
a
Institute of Computers and Information Science, Technical University of Czestochowa, Dabrowskiego 73, 42-200 Czestochowa, Poland
b
Reuters Research, Inc., 3 Times square, location 17-W15, New York, NY 10036, USA
Received 1 February 2004; accepted 30 September 2004
Available online 7 January 2005

Abstract

The problem of investment project estimation is considered as the multiple criteria hierarchical task of choosing the
optimal alternative (project). The mathematical tools of fuzzy sets theory are used for representation of uncertainty and
building of local criteria, based on the quantitative and qualitative parameters characterizing the considered projects.
The problems of ranked local criteria aggregation are analyzed and some new theoretical results, which can be useful
for proper choice of aggregation method, are presented. The new method for generalization of aggregation schemes
based on level-2 fuzzy sets mathematical tools is proposed and illustrated. The method for dealing with hierarchical
structures of local criteria is presented as well. The theoretical consideration is illustrated with simple examples and their
realization by authors’ software.
r 2004 Elsevier B.V. All rights reserved.

Keywords: Multiple criteria optimization; AHP; Decision making; Investment project estimation; Fuzzy sets

1. Introduction of considered projects, such as net present value

Traditional approaches to the investment pro-
ject estimation are usually based on the budgeting,
i.e. analysis of the discounted financial parameters
Corresponding author. Tel.: +1 646 223 8182; fax:
+1 646 223 4123.
E-mail addresses: sevast@icis.pcz.czest.pl (P. Sevastianov),
Dmitry.Sevastyanov@reuters.com (D. Sevastianov).
1
The statements made and the views expressed are solely
those of the author and should not be attributed to his
employer.
(NPV), internal rate of return (IRR) and so on.
The estimation of the investment efficiency, as well
as any forecasting, is rather an uncertain problem
and so the proper methods for operating in
uncertain setting must be used. Since the applic-
ability of traditional probability methods is
often restricted by absence of objective probabil-
istic information about future events, during
last two decades growing interest in the applica-
tion of interval and fuzzy methods in budgeting
has been observed; see Ward (1985), Kuchta

0925-5273/$ - see front matter r 2004 Elsevier B.V. All rights reserved.
doi:10.1016/j.ijpe.2004.09.014
 ARTICLE IN PRESS
L. Dimova et al. / Int. J. Production Economics 100 (2006) 10–29
(2000), Dimova et al. (2000) and Kahraman et al.
(2002).
On the other hand, when analyzing the invest-
ment project we consider (perhaps, implicitly)
some local criteria based on calculated financial
parameters. So, the project estimation is in essence
a multiple criteria problem and as examples of
successful systematization, the local criteria sets
proposed by Lopes and Flavel (1998), and by
Wang (2004) may be considered.
Even skin-deep analysis of these criteria system-
atization allows us to conclude that investment
and project quality estimation is the complicated
multiple criteria problem frequently having certain
hierarchical structure.
There are a lot of multiple criteria methods
proposed in literature for solving economical and
financial problems. Steuer and Na (2003) pre-
sented the widest review of this problem based on
more than 250 literature indices. Nevertheless, we
can cite the only few papers devoted to the
multiple criteria financial project estimation; see
Wang (2004), Mohamed and McCowan (2001)
and Li and Sterali (2003).
It is worth noting that in all these works the
fuzzy sets theory concepts were used. The method
of Mohamed and McCowan (2001) is based on a
representation of the local criteria by membership
functions and their aggregation using simple fuzzy
summation. The ranks of local criteria and
possible hierarchical structure of the problem were
not taken into account.
The hierarchical structure of the problem is
considered in Weck et al. (1997) and the well-
known AHP method is used for its building, but
simple normalization of financial parameters
(dividing them by their maximal values) is applied
instead of natural local criteria. An interesting
example of practical application of the multiple
criteria hierarchical analysis is presented by Li and
Sterali (2003). The generalized AHP method has
been used for estimation of 103 mutually depen-
dent investment projects proposed for the Tumen
river region (China) industrial development.
We do not intend to make here the detailed
review of these works, but as a result of the
analysis we have done in the field of investment
project estimation as well as in some other
11
practical applications of multiple criteria analysis,
the key problems we discuss further in this paper
may be formulated as follows:
1. The local criteria may be constructed on the
basis of quantitative parameters such as financial
ones, as well as using expert subjective estimations
(verbal assessments of project’s scientific, techno-
logical level, etc). It is known that experts prefer to
give rather ‘‘fuzzy’’ advice on linguistic level of
presentation to avoid possible mistakes connected
with qualitative prediction of future events. At the
same time, human experience and intuition play an
important role in project estimation and they
cannot be ignored, although the specific uncer-
tainty is their inherent property. This uncertainty
is of subjective, fuzzy nature and cannot be
described in usual probabilistic way.
So a proper methodology is needed to take into
account the uncertainty factors, which will allow
to build a set of comparable local criteria based on
directly measurable quantitative parameters, as
well as on linguistically formulated assessments.
The mathematical tools of fuzzy sets theory
elaborated for dealing with subjective kind of
uncertainty (Zadeh, 1965) may be successfully
used for this purpose.
2. Some criteria are competitive ones, i.e. an
improvement of one criterion inevitably leads to a
deterioration of another. This feature must be
taken into account when creating any multiple
criteria method since the compromise among
competitive, sometimes antagonistic, local criteria
is the major problem of decision making.
3. Usually criteria are not equivalent, i.e. they
make different contribution to the integral estima-
tion of project quality. So, the problem of local
criteria ranking arises and suitable well-defined
method should be chosen to resolve it.
4. Real world decision problems may involve a
lot of local criteria to be analyzed simultaneously.
Regrettably, the human ability to do this is
strongly restricted by the known empirical 772
law of psychology, according to which a person
can normally distinguish no more than 7 plus
minus 2 classes or grades on some feature scale. If
the number of grades is greater, the adjacent
grades start to merge and cannot be clustered
confidently; see Miller (1956) and Milner (1970).
 ARTICLE IN PRESS
12 L. Dimova et al. / Int. J. Production Economics 100 (2006) 10–29
To solve this problem the relevant aggregation of
local criteria, taking into account their ranking,
can be used to create some generalized criteria.
5. Criteria may compose a multilevel hierarch-
ical structure when a given set of local criteria
consists of certain subgroups connected logically.
The list of problems can be continued. For
instance, some problems appear when fuzzy valued
financial parameters are used as arguments of
functions representing the local criteria (Dimova
et al., 2000) or when such functions are fuzzy
as well (Dymova et al., 2002; Dymova, 2003), but
detailed analysis of these issues is beyond the scope
of this paper.
We can say that almost all components for
building the efficient method that may be used in
the majority cases of real-life project estimations
are already elaborated and described in literature.
What is needed is their critical analysis from the
viewpoint of the considered problem, and proper
synthesis of them into an integrated method for
hierarchical multiple criteria estimation of invest-
ment projects. For these reasons the rest of the
paper is organized as follows. In Section 2, the
fuzzy sets theory method for building local criteria,
based on the quantitative and qualitative para-
meters, is presented and illustrated. Section 3 is
devoted to the ranking of local criteria on the base
of their pair comparison. The problems of local
criteria aggregation are analyzed in Section 4.
Some new theoretical results, which can be useful
for proper choice of the aggregation method, as
well as the new method for generalizing the
aggregation schemes, based on the level-2 fuzzy
sets mathematical tools, are presented as well. In
Section 5, the method for dealing with hierarchical
structures of criteria is described. Everywhere we
will try to illustrate our mathematical considera-
tions with the use of simple illustrative examples
realized through the author’s software. Finally, the
concluding section summarizes the paper and
discusses future research issues.
2. Local criteria presentation
In practice, local criteria are usually based on
parameters of different nature. Hence, the special
mathematical technique is needed to represent the
local criteria in some general form allowing their
direct comparison. It is suitable to use mathema-
tical tools of fuzzy sets theory for this purpose.
Let us consider such important quantitative
financial parameters as IRR, and NPV. Since IRR
is measured in percentages whereas NPV ac-
counted in currency units, it seems impossible to
compare them while estimating the project. How-
ever, it can be done using functions presenting the
local criteria based on these financial parameters.
It is worth noting that introducing of such
function does not lead to the loss of the original
information, quite the contrary. Really, if x is
some parameter of analyzed system representing
its quality to certain extent, then some scale of
preference—presented on numerical or verbal
level—for this parameter inevitably exists at least
in the decision maker’s mind. Indeed, such
preference type information is the key to deci-
sion-making and local criteria are the mathema-
tical tools for its formalization.
Often they can be built using the following
simple and natural procedure.
For example, when considering IRR, it is easy
to see that there always exists some lower bound
for permissible values of IRR, usually being equal
to the bank rate, r. Further, there is some interval
rpIRRpIRRm ; where project’s quality rises
gradually with IRR increase. Finally, it is expected
that if IRRXIRRm ; the project’s efficiency with
respect to IRR is so high that it is difficult to make
a reasonable choice among such excellent projects.
To transform this description into a mathema-
tical form the membership function, which is the
pivotal concept of Fuzzy Sets Theory, may be
used. The membership function m(IRR) represent-
ing the local criterion based on IRR for some
analyzed example is shown in Fig. 1.
The values of membership functions change
from zero (for the worst values of quality
parameters) to maximum value equal to 1 in the
area of best values of analyzed quality parameters.
So, in a context of the considered problem the
values of membership functions may be treated as
degrees of quality parameter’s preference.
The linear form of membership function is not a
dogma. However, in the practice what we usually
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L. Dimova et al. / Int. J. Production Economics 100 (2006) 10–29 13

(IRR) know is only that some value is more preferable

1 than other without any certain quantitative
estimation of this preference. In other words, in
most cases we deal with the so-called ‘‘linear
ordering’’ and for such situations the linear form
0.5 of criterion function is proved to be the best one
(Yager, 1980).
Since the membership function must be convex
IRR and normalized to 1, the only few forms of such
0 function, presented in Fig. 2, may normally be used.
r IRRm
Of course, if the probability distribution of quality
Fig. 1. The membership function representing the local parameter is known, the corresponding membership
criterion based on IRR. function may have a more complex form.

Fig. 2. The typical forms of membership functions.

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14 L. Dimova et al. / Int. J. Production Economics 100 (2006) 10–29
Consider a qualitative parameter presented in a
verbal form, e.g. such as ‘‘ecological impact on
region’’. It can be described by a set of statements
that linguistically represents the degrees to which
an analyzed project may affect the ecology of
region: ‘‘not significant’’, ‘‘slightly significant’’,
‘‘noticeably significant’’ and so on. As it was noted
above, no more than nine such linguistic degrees
may be used in practice. The linguistic variables
may be translated into a mathematical form by
presenting them in a form of triangular trapezoidal
fuzzy numbers. This approach is in accordance
with a spirit of fuzzy sets theory and undoubtedly
is very fruitful in a great number of applications,
especially in fuzzy logic. Nevertheless, when deal-
ing with the decision-making problems, we usually
do not have enough reliable information to build
such fuzzy numbers. Frequently, it is hard to
choose the base for such triangular trapezoidal
fuzzy numbers, due to the absence of any evident
reasons to prefer some base as the best one. In fact,
the set of linguistic terms such as ‘‘not significant’’,
‘‘slightly significant’’, ‘‘noticeably significant’’ and
so on in practice often represents only some labels
signed on the levels of the decision maker’s
preference scale.
So the membership function shown in Fig. 3
seems to be a quite sufficient level of abstraction
1


0.5
0
equivalence slight weak
preference preference
the grade of preference
Fig. 3. The membership functions of qualitative local criterion.
for formalization of local criteria in the majority of
real-life situations (of course, in some cases the
use of more complex descriptions, e.g. on the base
of type 2 fussy sets, may be preferable (Dymova
et al., 2002; Dymova, 2003).
Finally, we can see that all the qualitative and
quantitative local criteria can be naturally pre-
sented within the universal scale of membership
function.
To make our further analysis more transparent,
consider a simple example which is not the
description of any real project estimation situation
but reflects the main advantages of proposed
approach.
Assume we have four projects to be compared
taking into account five quality parameters
(Fig. 4). Obviously, the number of the parameters
can be much greater in a real situation, but four
following main financial parameters are almost
obligatory for consideration: IRR, NPV, profit-
ability index (PI), payback period (PB). The
project risk (R) is, generally speaking, a complex
aggregated characteristic estimated on the basis
of the quantitative data as well as expert qualita-
tive estimations. Details can be found in Doumpos
et al. (2002).
Suppose for the sake of simplicity that in our
example the risk is estimated in such a way that it
noticeable strong
preference preference
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L. Dimova et al. / Int. J. Production Economics 100 (2006) 10–29
Fig. 4. The values of parameters used in illustrative example.
ranges in interval from 0 to 1. All numerical values
characterizing considered projects are presented
in Fig. 4.
The next step is building of the membership
functions. In fact, the decision maker has to select
an appropriate type of the function (see Fig. 2) and
choose no more than four reference points on a
scale of the analyzing parameter to define com-
pletely the corresponding membership function.
One may assign the reference points on the basis of
expert evaluations, statistical analysis of similar
projects or strong (e.g. banking) standards and so
on. We will try to use the simpler approach,
because in our case we just need to choose the best
of four projects. In our example (see Fig. 4) the
worst value of NPV among all the projects is equal
to 2500 and the best one is 4000. Therefore, it
seems reasonable to assume for the first reference
point x1 ¼ 2000; i.e. less than 2500 because we do
not want to reject the project No 1 when using
some types of local criteria aggregations (see
details in the Section 4). Obviously, for the next
point it is quite natural to assume x2 ¼ 4000; and
to obtain a complete description of the function we
introduce an auxiliary point x3 ¼ 6000 (see Fig. 5).
Other membership functions for considered
example are built in a similar way.
15
3. The ranking of local criteria
Since in real decision problems the local criteria
are usually expected to bring different contribu-
tion to the final aggregated estimation of alter-
natives, the appropriate method for local criteria
ranking is needed. It must be emphasized that
simple qualitative ordering of local criteria is not
enough for practical purposes: usually some
quantitative indices, representing the local criteria
contributions to the overall alternative estimation,
are necessary. Experience shows that quantitative
ranking of the criteria is more difficult task for a
decision maker than building of the membership
function. Though it is normally hard for decision
makers to rank the set of local criteria as whole,
they usually can confidently state preference, at
least verbally, when comparing only a pair of
criteria. Therefore, a proper criteria ranking
technique should use this pair comparison in a
verbal form. Such technique is based on the so-
called matrix of linguistic pair comparisons,
suggested by Saaty (1997). The procedure of
building this matrix for our example is illustrated
in Fig. 6.
Of course, only nine basic verbal estimates are in
use. Linguistic scales used in such estimations may
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16 L. Dimova et al. / Int. J. Production Economics 100 (2006) 10–29

Fig. 5. The building of membership function.

Fig. 6. The matrix of pair comparison.

have different sense, but a number of the scale feature of human thinking (Borisov and Korneeva,
levels (linguistic granules) cannot be more than 1980). Nevertheless, to be able to make calcula-
nine in any natural languages: this is an inherent tions some natural numbers are assigned to the
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L. Dimova et al. / Int. J. Production Economics 100 (2006) 10–29 17

verbal estimations. Nevertheless, the numbers in  the geometric row means method (GRM),
Fig. 6 are shown only to illustrate our theoretical  the weighted least squares method (WLSM)
considerations. In practice, it is not advised to
and a category of methods that involve only
show any numbers to the experts. More reliable
arithmetic operations:
result can be obtained when only the linguistic
opinions of an expert are taken into consideration.  the row means of normalized columns approach
The fact is that if you propose to a group of (Saaty, 1977),
experts to estimate some known objects, their  the normalized row sum and the inverted
verbally expressed opinions usually are quite column sum methods (Lootsma, 1981).
similar. We cannot expect any other result: these
people learned using the same manuals, read the The relative advantages and drawbacks of these
same articles, worked in the same field. However, methods are reviewed and discussed in literature
if we force them to use some numbers for the not only for the case of crisp aij (Chu et al., 1979),
estimations (usually it is not easy to do, since but when the entries of pair comparison matrix A
nobody loves numbers) we do not obtain any themselves are represented by fuzzy numbers
consensus (Zollo et al., 1999). The matter is that (Chang and Lee, 1995; Mikhailov, 2003).
‘‘In the beginning was the Word’’ (The Holy Nevertheless, in general, since in practice we
Gospel of Jesus Christ). Numbers had appeared deal with an approximate equality (1), the natural
much later and during the last few millennia, criterion of pair comparison efficiency can be
which are a minute from historical viewpoint, presented as
people have not learned to use numbers properly n

X n X
ai 2
yet. So far we have been thinking using words, not S¼ aij  ; (2)
numbers, and even trying to teach our computers i¼1 j1
aj
this trick.
More strictly, let C i ; i ¼ 1; . . . ; n; be the local where ai are ranks obtained using considered
criteria to be ranked. Then pair comparison matrix method.
A can be created, such that any entry aij 2 A For this reason, it is quite natural to propose a
represents relative preference of the criterion C i method based on the minimization of S, i.e.,
when it is compared with the criterion C j : The pair Xn X n

ai 2
comparison matrix is reciprocal, meaning that S¼ aij  ! min (3)
aj
aij ¼ 1=aji and aii ¼ 1: If ai and aj represent values i¼1 j1
of ranks, then in a perfect case with a consistent
matrix, aij ¼ ai =aj ; aij ¼ aik akj and ranks ai ; i ¼ s:t:
1; . . . ; n; can be calculated easily. Unfortunately, in X n
real-world situations, we usually only have esti- ai ¼ 1
mates of aij ; and actual value for aij may be i¼1
Xn
unknown. Then the question arises: how to find ai ; ðsometimes restriction ai ¼ n is usedÞ: ð4Þ
i¼1
i ¼ 1; . . . ; n; such that
Using rich experimental data, Wagenknecht and
ai
aij
: (1) Hartmann (1983) have earnestly shown that the
aj method (3)–(4) (LSM) is the best one as it gives the
Various approaches have been proposed to least final values of S. On the other hand, in some
obtain these crisp ranks. In Chang and Lee cases the simplest row means of normalized
(1995), they were roughly classified as follows: columns method (Saaty, 1977)
pffi Qn
½n j¼1 aij
 the eigenvector method, ai ¼ n (5)
P p ffi Qn
 the least squares method (LSM), ½n j¼1 aij
 the logarithmic least squares method (LLSM), i¼1
 ARTICLE IN PRESS
18 L. Dimova et al. / Int. J. Production Economics 100 (2006) 10–29
may produce results good from the practical
viewpoint (Wagenknecht and Hartmann, 1983).
Of course, criteria weights in some special cases
may be interpreted differently. Some not inex-
haustive classification of such possible interpreta-
tions and an overview of corresponding ranking
methods are presented in Choo et al. (1999).
However, in our case the method based on
expressions (3), (4) seems to be completely corres-
ponding to the nature of the problem and suffi-
ciently justified mathematically.
4. Aggregation of local criteria
When all the membership functions of the local
criteria are built and corresponding ranks are
calculated, the next step is their aggregation for the
generalized project quality assessment. To do
this, various aggregation methods may be used.
The most
P popular is the simplest additive method
D ¼ ni¼1 ai mi ; where ai are ranks of the local
criteria presented by corresponding membership
functions mi : It is used in many well-known
decision-making models such as the analytic
hierarchy process (AHP) (Saaty, 1977), Multi-
attribute utility analysis (Pardalos et al., 1995) and
in specific applications (Büyüközkan and Feyzio-
ǧlu, 2004; Erol and Ferrell, 2003), but often
without any critical analysis. Nevertheless, the
problem of choice of appropriate aggregation
method is of perennial interest, because of its
direct relevance to practical decision-making
(Yager, 1979; Zimmerman and Zysno, 1980;
Peneva and Popchev, 2003).
Although Zimmerman and Zysno (1980)
stated that choice of aggregation scheme is a
context-dependent problem, we want to con-
tribute to its consideration from some other point
of view.
Firstly, it is possible to represent the member-
ship function of the local criteria as some
artificial functions of alternatives (comparing
investment projects). Such a transformation
can be carried out formally after the calculation
of the membership functions values for all
alternatives.
More strictly, let A and B be local criteria and
mA ; mB be their membership functions. Then for
each x 2 X ; where X is a set of alternatives,
the artificial functions mA ðxÞ; mB ðxÞ can be for-
mally introduced. Of course, x is not a variable
in a common sense, factually, it is only a label
(of number) assigned to the corresponding
alternative.
Hence, we can say that if for some x1 2 X ; we
have mA ðx1 Þ ¼ mB ðx1 Þ; then the alternative x1
satisfies the local criteria A and B in equal
extent, and if for some x2 2 X ; we have
mA ðx2 Þ4mB ðx2 Þ; then the alternative x2 satisfies
the local criterion A in a greater degree than
criterion B. In this way the initially multidimen-
sional problem can be formally transformed into
one-dimensional with the alternative number
(label) as the only variable.
4.1. Equally ranked local criteria
To make our consideration more transferable,
let us at first consider the situation when we have
only two local criteria A and B which are equally
important for a decision maker and therefore have
equal ranks, e.g. aA ¼ aB ¼ 1:
(a) So if X is a set of the alternatives and
mA ðxÞ; mB ðxÞ; x 2 X are membership func-
tions representing formally—as it is described
above—the local criteria A and B respectively,
then the best (optimal) alternative xo will be
such that:mA ðxo Þ ¼ mB ðxo Þ (since criteria A and
B are of equal importance),
(b) the value mA ðxo Þ is maximal in comparison
with all alternatives for which condition (a) is
verified.
In this spirit, the theorem useful for our further
analysis had been proved by Sevastianov and
Tumanov (1990). It can be formulated as follows:
Theorem 1. If A n B are equally ranked local
criteria represented on a set of the alternatives X
by corresponding membership functions mA ðxÞ;
mB ðxÞ; x 2 X ; such that they have unique maximal
points xA ; xB 2 X respectively, and
mA ðxA Þ4mB ðxA Þ; mB ðxB Þ4mA ðxB Þ; (6)
 ARTICLE IN PRESS
L. Dimova et al. / Int. J. Production Economics 100 (2006) 10–29
then optimal alternative xo can be found as
xo ¼ arg maxx2X ðmC ðxÞÞ;
mC ðxÞ ¼ minðmA ðxÞ; mB ðxÞÞ:
It is easy to see that function mC ðxÞ can be
naturally treated as an aggregation of local criteria
A and B.
What can be achieved using some other popular
aggregation methods is shown in Fig. 7. Ob-
viously, only the min-type aggregation (8) derives
the optimal alternative x2 (see Fig. 7) fulfilling the
natural restriction (a). All other aggregation
methods get the optimal alternatives x1 or x3
which is in Pareto region, but far from the actual
optimum (see Fig. 7).
Consider an important feature of the min-type
aggregation (8). Function
mC ðxÞ ¼ minðmA ðxÞ; mB ðxÞÞ
may be interpreted as a membership function of
the set C ¼ A \ B and value mA ðxÞ can be treated
as a degree to which an alternative x belongs to a
subset of alternatives that satisfy the local criterion
A (in a similar way the value mB ðxÞ can be
µA (x)
1.0 2 the maximum of the function mC ðxÞ does not
0.8 3 µB (x)
0.6 1 be satisfied for optimal alternative but the min-
µ
0.4
0.2
0.0
x1 x2 x3
x
Fig. 7. The methods of equally ranked local criteria aggrega-
tion: 1mC ðxÞ ¼ mA ðxÞmB ðxÞ; 2  mC ðxÞ ¼ 0:5 mA ðxÞ þ 0:5mB ðxÞ;
3  mC ðxÞ ¼ maxð0; mA ðxÞ þ mB ðxÞ  1Þ; x1 is the optimal alter-
native for 2 and 3 types of aggregation; x3 is the optimum of 1
type of aggregation; x2 is the optimal alternative for the
aggregation mC ðxÞ ¼ minðmA ðxÞ; mB ðxÞÞ:
19
considered). Since subset C (crosshatched region
in Fig. 7) is an intersection of subsets A and B
(7)
representing the local criteria, the optimal alter-
native must be a maximum point of function
(8)
mC ðxÞ; which represents a degree of compromise
between the local criteria. If in a framework of set-
type representation of A, B and C we consider a
case when A ¼ B; then it is quite natural to expect
C ¼ A \ B ¼ A \ A ¼ A (this is a simple idempo-
tency rule). On the other hand, it is possible only
when mC ðxÞ ¼ mA ðxÞ: It is easy to see that only the
min-type aggregation gives us proper result in this
case. It is important that only min-type aggrega-
tion guarantees the idempotency, i.e. A \ A ¼ A:
All other aggregation methods based on arithme-
tical operations, such as addition or multiplication
ones, give us the result A \ AaA that cannot be
explained reasonably. The only exception is the
case mA ðxÞ ¼ 0:5mA ðxÞ þ 0:5mA ðxÞ: In practice we
can meet more complicated situations than con-
sidered above. For example, the membership
functions can have several points of extreme. This
problem can be resolved by clustering a subset of
the alternatives into some Pareto regions as it is
shown in Fig. 8. Obviously, within such regions
(I, II, III in Fig. 8) all the conditions of Theorem 1
are verified.
Consider a situation when condition (6) of
Theorem 1 is violated. In this case (see Fig. 9)
coincide with any of the intersection points of the
functions mA ðxÞ; mB ðxÞ:
Observe that in this case condition (a) cannot
type aggregation gives us the best decision, as
usual.
Summarizing, we can state that the min-type
aggregation is the best choice in a case of two
equally ranked local criteria.
4.2. The local criteria of different importance
Assume that local criteria A and B are of
different importance for a decision maker, i.e. for
their ranks we have aA aaB : Since the additive and
multiplicative aggregations mC ðxÞ ¼ aA mA ðxÞ þ
aB mB ðxÞ and mC ðxÞ ¼ ðaA mA ðxÞÞðaB mB ðxÞÞ in a case
of aA
aB result in inappropriate decisions
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20 L. Dimova et al. / Int. J. Production Economics 100 (2006) 10–29

1
µB (x)

µA (x)

0.5

0
I II III
x

Fig. 8. The case of multi-extreme membership functions.

Theorem 2. Let the local criteria A and B satisfy all

1.0 µA (x)
the conditions of Theorem 1 except the equal
0.8 µB (x) importance condition, and criterion A is more
important than criterion B, i.e. aA 4aB :
0.6
Let x0 be an optimal alternative for a case of the
µ

0.4 equally ranked criteria A and B, i.e. x0 ¼

arg maxx2X ðminðmA ðxÞ; mB ðxÞÞÞ; and x10 be an opti-
0.2 mal alternative for a case of the weighted criteria,
i.e. x10 ¼ arg maxx2X ðminðaA mA ðxÞ; aB mB ðxÞÞÞ:
0.0
x* xj Then alternative x10 satisfies criterion B to a
x greater extent than criterion A, which is in contra-
Fig. 9. The case of condition (6) violation.
diction with an initial assumption for A to be more
important than B.
Proof. Observe that x10 is one of the roots of the
equation
(see Fig. 7), we looked for more correct aggrega-
tion rules. aA mA ðxÞ ¼ aB mB ðxÞ; (10)
Zimmerman (1987) proposed the following which can be rewritten as
aggregation mode:
bmA ðxÞ ¼ mB ðxÞ; (11)
m0C ðxÞ ¼ minðaA mA ðxÞ; aB mB ðxÞÞ: (9)
b ¼ aA =aB 41:
It is easy to see that in asymptotic case aA ¼ If xA ; xB 2 X are unique maximal points of the
aB ¼ 1 expression (9) reduces to the optimal min- membership functions mA ðxÞ; mB ðxÞ respectively,
type aggregation (8) and weighting in (9) appears then without loss of generality we can assume
to be logically justified. that xA oxB : In this case the function mA ðxÞ always
Nevertheless, in practice such aggregation can decreases in interval ½xA ; xB  and mB ðxÞ always
produce completely absurd results. increases in it.
 ARTICLE IN PRESS

L. Dimova et al. / Int. J. Production Economics 100 (2006) 10–29 21

µA (x) µB (x) the natural inequality mA ðx10 Þ4mB ðx10 Þ always takes
1.0 place.
In a general form expression (12) can be
0.8 µA′ (x) presented as
m0C ðxÞ ¼ ma11 ðxÞ ^ ma22 ðxÞ ^    ^ mann ðxÞ;
0.6
1X n
µ

a1 ; a2 ; :::; an 40; ai ¼ 1; ð13Þ

0.4 n i¼1
µB′ (x)
where 4 is a min-operator and n is a number of
0.2 the local criteria.
Thus, it can be stated that aggregation (12) is the
0.0 best one, but it is true only when the conditions of
x0 x0′
x Theorem 1 are verified. In practice, the situations
presented in Fig. 11 may occur, when the
Fig. 10. The min-type aggregation of ranked local criteria: conditions of Theorem 1 are violated.
m0A ðxÞ ¼ 0:8mA ðxÞ; m0B ðxÞ ¼ 0:2mB ðxÞ:
Obviously, in such a case the use of aggregation
(12) gives us an optimal alternative, which cannot
be considered as satisfactory decision, especially if
Then, taking into account that in Eq. (11), b41; the local criterion A is more important than
we can state that x10 4x0 and so mA ðx10 ÞomB ðx10 Þ: criterion B.
This means that less important criterion B is
satisfied in x10 better, than more important
criterion A. &
The theorem is illustrated in Fig. 10. 1.0
Obviously, in order to obtain qualitatively µA (x)
proper result the most important criterion should
be multiplied by a minimal rank, but such an
approach looks quite artificial and can cause 0.8
certain difficulties when the number of the local
criteria is greater.
An additional drawback of the considered
aggregation is that the general criterion m1C ðxÞ ¼ 0.6
minðaA mA ðxÞ; aB mB ðxÞÞ is not normalized to 1.
µ

Hence, it is difficult to assess the closeness of the

optimal decision to the global optimum.
Yager (1979) proposed the aggregation method, 0.4
which properly reflects the sense of ranking:
µB (x)
m0C ðxÞ ¼ minðmaAA ðxÞ; maBB ðxÞÞ; (12)
0.2
ðaA þ aB Þ=2 ¼ 1:
Observe that for aA ¼ aB ¼ 1 expression (12)
reduces to (8).
It is shown in Yager (1979) that if aA 4aB ; then 0.0
in optimal point x
x10 ¼ arg maxx2X minðmaAA ðxÞ; maBB ðxÞÞ Fig. 11. The violation of Theorem 1’s conditions.
 ARTICLE IN PRESS

22 L. Dimova et al. / Int. J. Production Economics 100 (2006) 10–29

1.0 µA (x) µB (x)

µC (x)
0.8 (µA (x)+µB (x)+µC (x))/3
min (µA (x), µB (x), µC (x))
µ (x)

0.6 µA (x)µB (x)µC (x)

0.4

0.2

0.0
x0 x1 x2 x3
x

Fig. 12. The case of three non-ranked local criteria. Fig. 13. Different types of aggregating operator.

Factually, the min-type aggregation, which does of only two local criteria such aggregations
not compensate in considered situation small frequently cannot reveal any preferences in Par-
values of one local criterion by greater values of eto-region (see Fig. 13).
another, does not properly represent contributions The results of theoretical analysis and our
of the local criteria to the overall estimation. practical experience make it possible to state that
Indeed, Theorem 1 is proved only for a case of the most reliable aggregation approach lies in a use
two local criteria. of the min-type operator (13).
The problem already arises in a case of three The multiplicative approach
local criteria. The case of three non-ranked local
criteria mA ðxÞ; mB ðxÞ; mC ðxÞ is shown in Fig. 12. It is Y
n
mC ðxÞ ¼ mai i ðxÞ (14)
hard to say that the alternative x2 is the optimal i¼1
one in a sense of Theorem 1, since there is no point
x 2 X in the Pareto-region such that mA ðxÞ ¼ appears to be somewhat less reliable and, finally,
mB ðxÞ ¼ mC ðxÞ: the additive (weighted sum) method
Moreover, the min-type aggregation sometimes
does not comply with intuitive concepts of decision X
n
mC ðxÞ ¼ ai mi ðxÞ (15)
makers about optimality; see Dubois and Koenig i¼1
(1991).
Therefore, when dealing with a complex task may be considered as unreliable and insensi-
characterized by a great number of local criteria, it tive when choosing an alternative in Pareto-
seems reasonable to use all possible types of region.
aggregations. If the results obtained using different The results of projects estimations for the
aggregation modes are similar, this fact may be example considered in Section 3 using all three
considered as a good confirmation of their aggregating methods are presented in Fig. 14.
optimality. In the opposite case an additional Observe that the min-type and multiplicative
analysis of local criteria and their ranking should aggregations give us similar resulting estimations,
be advised. which are far from those obtained using additive
It is worth noting that addition-type aggrega- aggregations.
tion and the so-called bounded difference aggrega- The proposed approach allows to estimate
tion, maxð0; mA ðxÞ þ mB ðxÞ  1Þ; might be used directly the contribution of each local criterion to
only with a great prudence, since even in a case the generalized project assessment (see Fig. 15).
 ARTICLE IN PRESS

L. Dimova et al. / Int. J. Production Economics 100 (2006) 10–29 23

Fig. 14. Result estimations of projects presented in Fig. 4 (min-type, multiplicative and additive aggregations are denoted by
D1 ; D2 ; D3 respectively).

Fig. 15. Contributions of local criterion to the final project’s assessment.


24 L. Dimova et al. / Int. J. Production Economics 100 (2006) 10–29
4.3. The aggregation of aggregation methods with
the help of level-2 fuzzy sets
The natural consequence of problems men-
tioned above is a growing interest to the methods
of generalization of the aggregating operators
(aggregation of aggregation modes); see Roubens
(1997).
For this purpose it is proposed to apply the
possibility theory (Dubois and Koenig, 1991) as
well as the weighted averaging aggregation; see
Yager (1988).
Also, Yager’s t-norms are used in Hauke (1999),
and the hierarchical aggregation approach is
developed; see Dyckhoff (1985), Migdalas and
Pardalos (1996). Nowadays the most popular is
the so-called g-operator (Zimmerman and Zysno,
1983).
!1g !g
Y Y
Z¼ mi 1  ð1  mi Þ ;
i i
i ¼ 1; 2; :::; n; 0pgp1;
where mi are membership functions corresponding
to local criteria.
Since expression (16) is based only on the
multiplicative aggregation, more general approach
has been proposed by Mitra (1988):
!,
X A¼
Zor ¼ g maxðmi Þ þ ð1  gÞ mi n; (17)
i
i
!,
X It can be seen when analyzing expression (20)
Zand ¼ g minðmi Þ þ ð1  gÞ mi
i
i
Expressions (17), (18) have been used in Shih
and Lee (2000) to solve the multiple-level decision-
making problem. As a key issue, the lack of strong
rules for choosing values of g is mentioned.
The work of Choi and Oh (2000) is specifically
devoted to this problem, but the method proposed
by the authors for choosing g demands too much
additional information to be presented by the
decision maker in a quantitative form. In practice
it is hard to obtain such information since it is not
directly related to the decision maker’s real
problems. It is easy to see that local criteria in
(17), (18) are considered to be non-ranked,
ARTICLE IN PRESS
whereas their ranking seems to be a more
important issue than choosing g: Finally, the
generalization modes (16)–(18) do not involve all
possible approaches to the aggregation.
Here we propose a simple but intuitively
obvious and mathematically strong approach to
the aggregation of aggregating methods based on
the level-2 fuzzy sets.
Originally, level-2 fuzzy sets were presented by
Zadeh (1971) and were more elaborately studied
by Gottwald (1979) and in the work of Tre and
Caluwe ( 2003). As proposed by Zadeh (1974), the
level-2 fuzzy set is such a fuzzy set, of which
membership grades assigned to the elements of the
universal set are ordinary fuzzy sets.
Since we deal with restricted number of com-
pared projects and aggregating methods, it is quite
sufficient to consider only discrete representation
of level-2 fuzzy set.
More strictly, if fuzzy set A is defined on a
discrete set xi, i ¼ 1; . . . ; N; and xi are presented by
ordinary fuzzy sets defined on discrete universe set
ð16Þ
zj ; j ¼ 1; . . . ; M; then A is a level-2 fuzzy subset
defined by following expressions:
   
mA ðxi Þ hi ðzj Þ
A¼ ; xi ¼ ; (19)
xi zj
( )
max½mA ðxi Þhi ðzj Þ
i
;
zj
i ¼ 1; . . . ; N; j ¼ 1; . . . ; M: ð20Þ
n: (18) that final grade of membership of zj to the set A
may be presented as
mA ðzj Þ ¼ maxi ½mA ðxi Þhi ðzj Þ; j ¼ 1; . . . ; M: (21)
Suppose there are sets of projects zj ; j ¼
1; . . . ; M; and N types of aggregating operators
Di ; i ¼ 1; . . . ; N; under consideration.
Since it is possible to estimate the relative
reliability of aggregation modes on a verbal level,
as it has been done above, it is natural to introduce
some membership function, mðDi Þ; i ¼ 1; . . . ; N;
representing expert’s opinions about closeness of
considering aggregating operators Di to some
perfect type of aggregation, which can be treated
as the best one or ‘‘ideal’’ method of aggregation.
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L. Dimova et al. / Int. J. Production Economics 100 (2006) 10–29 25

Then such ‘‘ideal’’ method, Dopt ; can be Using the method presented in Section 3 from
represented through its membership function and this matrix we obtain
a set of compared aggregation modes as in the
mðD1 Þ ¼ 0:7; mðD2 Þ ¼ 0:25; mðD3 Þ ¼ 0:05:
following fuzzy set:
  Thus, ‘‘ideal’’ method of aggregation in our case
mðDi Þ
Dopt ¼ ; i ¼ 1; . . . ; N: (22) can be presented as
Di    
mðD1 Þ mðD2 Þ mðD3 Þ 0:7 0:25 0:05
In turn, each Di can be described formally by a Dopt ¼ ; ; ¼ ; ; ;
D1 D2 D3 D1 D2 D3
fuzzy set of considered projects, zj ; j ¼ 1; . . . ; M;
on which it is, factually, defined and for which the where
aggregated estimations Di ðzj Þ have been calcu- 
Di ðProject_1Þ Di ðProject_2Þ Di ðProject_3Þ
lated. It is clear that the values Di ðzj Þ may be Di ¼ ; ; ;
treated as a degree to which project zj satisfies the Project_1 Project_2 Project_3

aggregated criterion Di or as an extent to which Di ðProject_4Þ
; i ¼ 1; 2; 3:
project zj belongs to a set of projects satisfying Di : Project_4
Then
Hence, Dopt can be presented as
  
Di ðzj Þ mopt ðProject_1Þ mopt ðProject_2Þ
Di ¼ ; i ¼ 1; . . . ; N; j ¼ 1; . . . ; M: Dopt ¼ ; ;
zj Project_1 Project_1
(23) 
mopt ðProject_3Þ mopt ðProject_4Þ
; ;
Substituting (22) into (23) we have Project_3 Project_4
 
mopt ðzj Þ where
Dopt ¼ ; j ¼ 1; . . . ; M; (24)
zj mopt ðProject_jÞ ¼ maxi ðmðDi ÞDi ðProject_jÞÞ;
where i ¼ 1; 2; 3:
mopt ðzj Þ ¼ max½mðDi ÞDi ðzj Þ: (25) Finally, after all calculations using the results
i
from Fig. 14 we obtain
It is clear that the best project can be found as  
0:18 0:05 0:42 0:31
zopt ¼ arg max mopt ðzj Þ: (26) Dopt ¼ ; ; ; :
j Project_1 Project_2 Project_3 Project_4
To illustrate, let us continue the consideration of So, the third project is the best one. Factually, we
the example. can infer the same result analyzing the data
At first, we have to calculate the values mðDi Þ; presented in Fig. 14, but it would be hard to do
i ¼ 1; 2; 3: As it has been stated above, the min- for a greater number of projects or/and aggregat-
type aggregation, D1 is more reliable than the ing operators under consideration.
multiplicative aggregation, D2 ; and both are
noticeably more reliable than the additive aggre-
gation D3 : 5. Hierarchical system of criteria
Such linguistic assessments, in accordance with
the method described in Section 3, can be As it has been noticed above, many of the real-
represented by following pair comparison matrix: life problems of investment (and other) project
estimations are not only multi-criteria but also
D1 D2 D3
multi-level (hierarchical) ones.
D1 1 3 9 The method presented in previous sections
D2 1/3 1 9 allows to build, in a natural way the branched
D3 1/9 1/9 1 hierarchical structures as in Fig. 16. It can be seen
that each criterion of upper k level is built on the
 ARTICLE IN PRESS
26 L. Dimova et al. / Int. J. Production Economics 100 (2006) 10–29
Dn
Dn-1,1 Dn-1,2
Dn-2,in-1,1 Dn-2,in-1,2
Dn-3,in-1,in-2,1
Fig. 16. The hierarchical structure of local criteria.
basis of local criteria of underlying (k1) levels
using one of the aggregation methods or their
generalization as proposed in Section 4. The
general expression for calculation of criteria on
intermediate levels of hierarchy is as follows:
Dk;in1 ;in2 ;...;ik
¼ f k;in1 ;in2 ;...;ik ðDk1;in2 ;...;ik ;1 ; ak1;in2 ;...;ik ;1 ; . . . ;
Dk1;in1 ;in2 ;...;ik ;mk;in1 ;in2 ;...;ik ;
ak1;in1 ;in2 ;...;ik ;mk;in1 ;in2 ;...;ik Þ;
where f k;in1 ;in2 ;...;ik is an operator of criteria
aggregation, mk;in1 ;in2 ;...;ik —the number of local
criteria on (k1) level, aggregating to intermediate
local criterion Dk;in1 ;in2 ;...;ik :
It is worthy to note that values Dn1;in1 always
are in interval [0,1] and may be interpreted as some
intermediate local criteria assessments. On the
lowest level of hierarchy the initial membership
Dn-1,in-1 Dn-1,mn-1
Dn-2,in-1,in-2
functions representing the local criteria based on
origin parameters of project’s quality are used, i.e.
D1;in1 ;in2 ;...;i1
¼ f 1;in1 ;in2 ;...;i1 ðm0;in1 ;in2 ;...;i1 ;1 ; a0;in1 ;in2 ;...;i1 ;1 ; . . . ;
m0;in1 ;in2 ;...;i1; m1;i ; a0;in1 ;in2 ;...;ik; m1;in1 ;in2 ;...;i1 Þ;
n1 ;in2 ;...;i1
where m1;in1 ;in2 ;...;i1 —the number of initial local
criteria on the lowest level.
The method for building of hierarchical local
criteria systems is based on the multiple criteria
approach described in previous sections and
generalizes it. The method is developed in a form
of user-friendly software (Fig. 17).
It is important that the presented method not
only gives us some generalized quantitative esti-
mation of projects as a whole but makes it possible
to assess the contribution of each local criterion in
this final estimation.
 ARTICLE IN PRESS
L. Dimova et al. / Int. J. Production Economics 100 (2006) 10–29
Fig. 17. Building of hierarchical local criteria system.
6. Conclusion
The paper presents the generalized method for
multiple criteria hierarchical estimation of invest-
ment projects in fuzzy setting. The key issue is the
analysis of the familiar approaches to aggregation
of local criteria. The problems of ranked local
criteria aggregation are analyzed and some new
theoretical results, which can be useful for proper
choice of aggregation method, are presented. It is
proved that most popular weighted sum method is
the most unreliable one and can provide wrong
results. All the known aggregation modes have
their own advantages and drawbacks and it seems
impossible to choose the best one, especially when
dealing with complicated hierarchical problem.
Therefore, the new approach which makes it
possible to generalize the aggregating schemes
into some ‘‘ideal’’ criterion is elaborated using the
mathematical tools of level-2 fuzzy sets. It is
shown that proposed method allows to build in a
natural way the branched hierarchical structures
27
of project’s local criteria. The theoretical consid-
eration is illustrated with simple examples and
their realization by author’s software.
The main direction of future research will be
generalization of proposed approach using the
concept of hyperfuzzy sets (Dymova et al., 2002),
which being the useful particle case of type-2 fuzzy
sets for representation of verbally formulated local
criteria and parameters of project’s quality.
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