CEF.UP – WiP Webinar

Tuesday – April 13^th, 2021 at 3:00 p.m.

“Building a Composite Index using the Multi-objective Approach: An application to the case of human development”.

Elif Öztürk – FEP

Abstract:

“Composite indicator (CI) is a powerful tool to observe the performance of various alternatives when several dimensions are in question. Normalisation, weighting and aggregation are known as the three obligatory steps to build a CI. The current paper proposes a new and unconventional method, which does not require any of these steps, to construct a CI. In this method, we suggest using the Pareto frontier concept, a term in the multi-objective optimisation, to set the solutions  (e.g. countries, firms, or alternatives) in an order. Pareto frontiers help to collect similar solutions together according to their performance on several dimensions, sequentially. Each Pareto frontier represents a different achievement level. However,  it is not possible to evaluate the solutions located in the same Pareto frontier using multi-objective optimisation. To identify the performance of each solution within the Pareto frontiers, we implement the ordered probit regression model and predict the latent variable that represents the specific problem by using the estimated results. We use this proposed methodology to re-measure human development. A comparison took place between the Human Development Index (HDI) and our proposed method. According to the results, the country ranks in the proposed method show a significant difference compared to the HDI, although there is a high Spearman’s rank correlation. This method is strong and reliable because it does not require any vague selection of obligatory steps to build a CI. Moreover, it provides fully non-compensatory results and an influential ranking of the solutions.”