3/6/24, 6:47 AM Multi-Criteria Decision Analysis - What Is It, Examples, Methods

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Multi-Criteria Decision Analysis

Article by Edited by Reviewed by
Wallstreetmojo Team Ashish Kumar Srivastav Dheeraj Vaidya, CFA, FRM

Introd

What Is Multi-Criteria Decision Analysis

(MCDA)? Enter

Multi-Criteria Decision Analysis (MCDA) is a systematic and structured

approach used to evaluate and compare options based on multiple criteria
or objectives. The purpose of MCDA is to provide a framework for decision-
* Plea
makers to assess various alternatives objectively and transparently,
considering multiple criteria relevant to the decision context.

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Introd

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By considering multiple criteria, MCDA allows decision-makers to explore * Plea

different options’ trade-offs and potential impacts, leading to more robust and
well-informed decisions. MCDA is important because it helps decision-makers
handle complex decision problems by providing a structured and systematic
process. It allows for a comprehensive evaluation of alternatives and helps
decision-makers weigh the relative importance of different criteria.

Table of contents

What Is Multi-Criteria Decision Analysis (MCDA)?

Multi-Criteria Decision Analysis Explained

Methods

Examples

Trends

Advantages and disadvantages

Frequently Asked Questions (FAQs)

Recommended Articles

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3/6/24, 6:47 AM Multi-Criteria Decision Analysis - What Is It, Examples, Methods


Key Takeaways

MCDA allows for a comprehensive evaluation of alternatives by

considering multiple criteria simultaneously, enabling a more
informed and balanced decision-making process.

MCDA provides a structured framework that enhances transparency, Introd

traceability, and stakeholder involvement, promoting more robust
and accepted decisions.

MCDA helps decision-makers understand the trade-offs and potential

impacts of different options, facilitating a better understanding of the
decision problem and enabling informed choices aligned with their
priorities.
* Plea
While MCDA offers advantages such as comprehensive evaluation
and transparency, it also has limitations related to subjectivity, data
requirements, complexity, and simplifying real-world situations.
Awareness of these limitations is crucial for utilizing MCDA effectively.

Multi-Criteria Decision Analysis Explained

Multi-Criteria Decision Analysis (MCDA) is a structured methodology used to
assess and compare options based on multiple criteria. It is a decision-making
tool that helps individuals or organizations make informed choices when faced
with complex and conflicting factors.

MCDA serves the purpose of providing a systematic framework to evaluate

alternatives considering a variety of criteria relevant to the decision context. By
incorporating multiple criteria, MCDA enables decision-makers to explore trade-
offs and understand the potential impacts of different options, leading to more
robust and well-informed decisions. MCDA enhances decision-making

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3/6/24, 6:47 AM Multi-Criteria Decision Analysis - What Is It, Examples, Methods

transparency, promotes stakeholder involvement, and improves decision


consistency and reproducibility, achieving more effective and satisfactory
outcomes.

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Methods
Several methods are commonly used in Multi-Criteria Decision Analysis (MCDA)
to support decision-making processes. Here are a few commonly employed
techniques:

1. Weighted Sum Model: This method involves assigning weights to each

criterion based on relative importance and then calculating a weighted sum
for each alternative. The alternative with the highest weighted sum is
considered the most favorable.

2. Analytic Hierarchy Process: Analytic Hierarchy Process decomposes

complex decisions into a hierarchical structure of criteria and sub-criteria.
Decision-makers make pairwise comparisons between criteria to derive their
relative priorities, which are then used to calculate overall scores for
alternatives.

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3. Technique for Order Preference by Similarity to Ideal Solution: It


measures the relative proximity of each alternative to an ideal solution and a
worst-case solution. The best choice is the alternative with the shortest
distance to the ideal solution and the greatest distance to the worst-case
solution.

Examples
Let us look at the examples to understand the concept better. Introd

Example #1
Consider a company evaluating different investment opportunities and needs to
select the most suitable option based on multiple criteria. The criteria for
evaluation could include factors such as return on investment (ROI), risk level,
liquidity, and market potential. Each criterion would be assigned a weight * Plea
reflecting its importance to the company’s investment strategy.

The company would get information for each investment opportunity, such as
historical performance, projected growth, market analysis, and liquidity
indicators. They would then rate each option according to the criteria, considering
expected ROI, risk assessments, liquidity ratios, and market forecasts.

Using Multi-Criteria Decision Analysis techniques, such as the weighted sum

model or AHP (Analytic Hierarchy Process), the decision-makers would calculate a
score for each investment opportunity based on the assigned weights and the
ratings. The opportunity with the highest overall score would be considered the
most favorable choice for investment. This approach helps decision-makers
consider the trade-offs between ROI and risk, assess the liquidity requirements,
and identify opportunities with the highest market potential.

Example #2
Consider a city government deciding on the best location for a new public park.
They have identified four potential sites and must evaluate them based on

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multiple criteria. Thus, the evaluation criteria could include accessibility,

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environmental impact, community engagement, and cost. Also, each criterion can
be assigned a weight or importance based on the city’s priorities.

The decision-makers can then gather data for each criterion and rate each site
accordingly. For example, they may collect data on the proximity of each site to
residential areas and public transportation, assess the ecological value of the land,
analyze the potential for community involvement and engagement, and estimate
the costs associated with land acquisition and park development. Introd

The government can apply techniques like pairwise comparison or mathematical

models to calculate an overall score for each site, considering the weights
assigned to each criterion. The site with the highest score would be the preferred
choice for the new park location.

Trends * Plea

Let us look at Multi-Criteria Decision Analysis trends or use cases to understand

the concept better.

1. Integration of Artificial Intelligence (AI): There is a growing trend of

integrating AI techniques into MCDA models. AI algorithms, such as machine
learning and neural networks, can enhance the accuracy and efficiency of
decision-making processes by automating data analysis, identifying
patterns, and improving predictive capabilities.

2. Sustainable Decision-Making: With an increased focus on sustainability

and environmental considerations, MCDA is being utilized to support
sustainable decision-making. This involves incorporating environmental
impact, social responsibility, and long-term sustainability criteria into
evaluating alternatives.

3. Real-Time Decision-Making: Traditional MCDA often relies on static data,

but there is a trend toward incorporating real-time data and dynamic
modeling techniques. This enables decision-makers to adapt their

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evaluations and make more agile decisions based on the latest information
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and changing circumstances.

Advantages And Disadvantages

Let us look at the advantages of Multi-Criteria Decision Analysis:

1. Comprehensive Evaluation: MCDA allows decision-makers to consider

multiple criteria and factors simultaneously, providing a more comprehensiveIntrod
evaluation of alternatives. This enables a more holistic and balanced
decision-making process.

2. Transparent and Structured Approach: MCDA provides a structured

framework that enhances transparency in decision-making. Thus, it allows
decision-makers to clearly define criteria, assign weights, and assess
alternatives, ensuring a systematic and traceable process.
* Plea
3. Trade-off Analysis: MCDA helps in identifying trade-offs between different
criteria and objectives. Decision-makers can understand the potential
impacts and trade-offs associated with different options, enabling them to
make informed choices that align with their priorities.

Let us look at the disadvantages of Multi-Criteria Decision Analysis:

1. Subjectivity: Multi-Criteria Decision Analysis requires decision-makers to

assign weights to criteria, which involves subjective judgments. Hence,
different decision-makers may assign different weights, leading to potential
biases and variations in the final decision.

2. Data Requirements: MCDA relies on data and information for evaluating

criteria and alternatives. Also, obtaining accurate and reliable data can be
challenging, and data limitations or inaccuracies can impact the reliability
and validity of the analysis.

3. Simplified Models: MCDA often simplifies complex real-world situations

into a structured model. Thus, this simplification can overlook certain

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nuances and interdependencies, potentially leading to oversights or

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oversimplifications in decision-making.

Frequently Asked Questions (FAQs)

1. What types of decision problems are suitable for multi-criteria decision
analysis (MCDA)?
MCDA is suitable for decision problems that involve evaluating and comparing
alternatives based on multiple criteria or objectives. It can be applied to various Introd

domains such as project selection, resource allocation, risk assessment,

environmental planning, and investment analysis.

2. How can MCDA handle subjective judgments in the decision-making

process?
MCDA acknowledges the presence of subjective judgments by allowing decision-
makers to assign weights to criteria based on their preferences. This enables * Plea

decision-makers to reflect on their relative importance. By providing a transparent

and structured framework, MCDA helps ensure that subjective judgments are
made explicit and can be discussed and reviewed during decision-making.

3. How can MCDA support decision-making in complex and uncertain

environments?
MCDA can support decision-making in complex and uncertain environments by
allowing decision-makers to consider multiple factors and their
interdependencies. The systematic and structured approach of MCDA provides
decision-makers with a framework to assess the potential impacts of uncertainties
and make robust and adaptable decisions to changing conditions.

Recommended Articles
This has been a guide to what is Multi-Criteria Decision Analysis. We explain its
examples, methods, advantages, disadvantages, and trends. You can learn more
about it from the following articles –

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