Composite Indicators as Decision Making Tools: The Joint Use of Compensatory and Noncompensatory Schemes.

Abstract

Composite indicators are powerful tools for summarizing, focusing and condensing the complexity of our dynamic environment, and their use has become indispensable for managing huge amounts of information. An important aspect to emphasize when constructing composite indicators is the compensatory character among the individual indicators. In general, a fully compensatory scheme provides an overall assessment of the performance of each unit, while a non-compensatory scheme detects the worst single performances. When used in a decision making framework, the joint consideration of both schemes may, therefore, be helpful. Nevertheless, in the literature, few approaches allow the construction of composite indicators for different compensation degrees. On these premises, the aim of this paper is to illustrate the behavior of some methodologies that build composite indicators allowing different compensation degrees. We analyze the results provided by each of these methods and which of them provide a more varied complementary information when considering both compensatory and non-compensatory scenarios. An illustrative example is used to visualize the results.