Optimism Bias
Within the literature of project management, considerable attention has been given to the tendency of those appraising a new project, and those engaged in bidding for its operation, to over-estimate the benefits and to under-estimate the costs and the risks associated with delivery. In the UK, this has come to be referred to as 'optimism bias'.
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Toll Road Traffic and Revenue Forecasts Bain, Robert, 2009 A guide developed to better interpret the inputs into and outputs from traffic forecasting models for toll roads which can also be applied more broadly to infrastructure projects, especially those relying on future cash flow dependability. An abridged extract can be found here. ISBN 978-0-9561527-1-8 UK
The Performance of PPP Projects in Australia when Compared with a Representative Sample of Traditionally Procured Infrastructure Projects (PDF) Duffield, Colin, 2008 University of Melbourne
A report commissioned by the National PPP Forum as part of its study benchmarking PPPs against traditionally procured infrastructure on time and cost performance indicators.
AustraliaEstimation Bias in Public Infrastructure Projects (PDF) Fitzgerald, John, 2008 Masters Thesis in Public Infrastructure
A comparative analysis of approaches to risk allocation in Australian PPPs and traditional procurements. It draws on emerging data from a national benchmarking study of major projects which was set up in 2006.
AustraliaPerformance of Public Private Partnerships and Traditional Procurement in Australia (PDF) The Allen Consulting Group, 2007 The Allen Consulting Group/Infrastructure Partnerships Australia
This report compares cost and delivery of public projects under a public-private partnership model with traditional (i.e. government) procurement models. PPPs are found to be the best route to deliver large, complex and expensive projects, offering substantial savings in both time and cost, and being less susceptible to optimism bias.
AustraliaBeyond The Dome (PDF) Taxpayers' Alliance, 2007 This note examines 305 recent major public projects in the UK and finds that the total cost overrun is £23billion, or 33.7%, between initial projection and completed price. There is then a taxonomy of comparative efficiency by region and department. UK
Traffic Forecasting Risk Study Update 2005: Through Ramp-Up And Beyond Standard & Poor's Corporates, 2005 This annual update on Standard & Poor's toll road traffic forecasting performance supports earlier conclusions, particularly that optimism bias and error remain prevalent. Importantly, these discrepancies remain constant over time with no systematic improvement from Year 1 to Year 5 and cannot be explained by a failure to account for ramp-up on project opening. UK
Procedures for Dealing with Optimism Bias in Transport Planning:Guidance Document (PDF) Flyvbjerg, Bent and Cowi, 2004 UK Department for Transport This guidance document provides empirically-based optimism-bias up-lifts for selected classes of transport projects, as well as guidance on using these up-lifts to produce more realistic forecasts for the individual projects' capital expenditures. UK
Traffic Forecasting Risk: Study Update 2004 (PDF)
Standard & Poor's Infrastructure Finance, 2004
Traffic Forecasting Risk: Study Update 2003 (PDF)
Standard & Poor's Infrastructure Finance, 2003
Supplementary Green Book Guidance on the Treatment of Optimism Bias HM Treasury, 2003 This guidance note is intended to assist appraisers in (i) making adjustments to estimates of capital and operating costs, benefits values and time profiles, and (ii) providing a better estimate of the likely capital costs and works' duration. UK
Delusions of Success: Comment on Dan Lovallo and Daniel Kahneman (PDF) Flyvbjerg, Bent, 2003 Harvard Business Review, December Issue, pp. 121-122 This commentary highlights the strengths of Lovallo and Kahneman's work on over-optimism, competitor neglect and the outside view in forecasting while suggesting an overlooked source of bias - the deliberate cooking of forecasts to get ventures started (aka the Machiavelli factor). USA
Delusions of Success: How Optimism Undermines Executives' Decisions Lovallo, Dan and Kahneman, Daniel , 2003 Harvard Business Review, Vol. 81, No. 7 This landmark article shows that a combination of cognitive biases including anchoring, competitor neglect and organisational pressures lead managers to make overly optimistic forecasts in analysing proposals for major investments. The biases and pressures cannot be escaped but they can be tempered by applying a very different method of forecasting - one that takes a much more objective "outside view" of an initiative's likely outcome. DOI: 10.1225/R0307D USA
Megaprojects and Risk: An Anatomy of Ambition Flybjerg, Bent; Bruzelius; Nils & Rothengatter, Werner, 2003 Cambridge University Press This short but influential book provided the first detailed examination of the 'metaprojects' phenomenon. It argues that getting multi-billion-dollar public works approved and built often relies upon a cocktail of underestimated costs, overestimated revenues, undervalued environmental impacts and overvalued economic benefits. The authors not only explore these problems but also suggest practical solutions to expose misrepresented risk in appraisal and construction of large-scale public projects. Germany
Review of Large Public Procurement in the UK (PDF)
MacDonald, Mott, 2002
HM Treasury
This study provides guidance for the public sector to evaluate and reduce excessive optimism in project esitmates during appraisals. It was commissioned by HM Treasury as part of an exercise to revise the Green Book, the UK Government's previous appraisal and evaluation guidelines.
UK
The Channel Tunnel Rail Link (Web Page) House of Commons Public Accounts Committee, 2002 The Stationery Office
This is the PAC report following up on the NAO's 'The Channel Tunnel Rail Link' report, which examined the 1998 restructuring of the PFI deal for the cross-Channel rail service.
HC 630 UKUnderestimating Costs in Public Works Projects: Error or Lie? Flyvbjerg, Bent; Skamris Holm; Mette & Buhl, Søren , 2002 APA (American Planning Association) Journal, 68:3, pp.279-295 This study aims, through large-sample study, to investigate the differences between actual and estimated costs in transport infrastructure projects, to subject these differences to rigorous statistical analysis and to draw implications for policy and decision-making regarding transport infrastructure development. USA
Traffic Risk in Start-Up Toll Facilities (PDF) Standard & Poor's Infrasture Finance, 2002 This commentary provides guidelines for evaluating toll-road traffic and revenue forecasts. It draws upon thirty-two case studies from various regions around the world to present empirically-based advice on minimising optimism bias and associated costs in toll-road start-up projects. UK
Big Decisions, Big Risks: Improving Accountability in Mega-Projects Bruzelius, Nils; Flyvbjerg, Bent; Rothengatter; Werner , 2002 Transport Policy, 9, pp.143-154 In this policy analysis the conventional approach to metaproject development is replaced by an institutionalistic one focusing on risk and accountability. Redrawing the borderlines of private and public involvement, four specific measures to handle risk and accountability are suggested and detailed: (i) transparency, (ii) performance specifications, (iii) explication of regulatory regimes, and (iv) involvement of risk capital. Germany
Inland Navigation System Planning: The Upper Mississippi River-Illinois Waterway National Research Council, 2001 Washington, DC: National Academy Press This is the report of an inquiry into a feasibility study by the Army Corps of Engineers. The original feasibility study was to address the most efficient means of relieving congestion on the Upper Mississippi River and the Illinois Waterway. The inquiry followed a Corps employee's allegation that officials manipulated the original study to show that large-scale construction was the most efficient solution. USA
Report of Investigation Concerning a Feasibility Study on UMR and IWW U.S. Army Inspector General, 2001 Department of the Army This is the report of an investigation concerning a feasibility study by the Army Corps of Engineers. The original feasibility study was to address the most efficient means of relieving congestion on the Upper Mississippi River (UMR) and the Illinois Waterway (IWW). The investigation followed a Corps employee's allegation that officials manipulated the original study to show that large-scale construction was the most efficient solution. USA
The Channel Tunnel Rail Link (Report) (PDF) National Audit Office, 2001 The Stationery Office This report examines the 1998 restructuring of the Channel Tunnel Rail Link PFI deal including the reasons for restructuring rather than choosing other options, the likely implications of restructuring for public expenditure and the justification for the direct gains on offer to the Link. HC 302 UK
The Re-Negotiation of the PFI-Type Deal for the Royal Armouries Museum in Leeds House of Commons Public Accounts Committee, 2001 The Stationery Office This report examines the Royal Armouries PFI deal (1993), which was renegotiated in 1999 after encountering serious problems due to unfulfilled visitor forecasts. The committee examines the original commercial deal and its over-estimated forecasts, and the renegotiated contract and associated risk of the museum remaining in private sector operation. HC 359 UK
How Reliable are Estimates of Infrastructure Costs? A Comparative Analysis Nijkamp, P. & Ubbels, B. , 1999 International Journal of Transport Economics, 26:1, pp.23-53 This paper investigates the causes of misjudgement in infrastructure costs by distinguishing systematically various classes of miscalculations and misrepresentations. Amsterdam, The Netherlands
Twenty-one Sources of Error and Bias in Transport Project Appraisal Mackie, Peter & Preston, John , 1998 Elsevier Science Ltd., Pergamon In this research paper promoters and forecasters for transport projects are held to be overly optimistic in the appraisal phase with the result that subsequent returns are disappointing. The authors identify and discuss a series of sources for these optimism biases. USA
Inaccuracy of Traffic Forecasts and Cost Estimates on Large Transport Projects Skamris, Mette K. & Flyvbjerg, Bent, 1997 Transport Policy, vol. 4, no. 3, pp. 141-146. This policy paper examines weakness in forecasting for large-scale transport projects. The authors examine both underestimated costs and overestimated benefits in drawing their conclusions on rampant optimism bias in this sector. Germany
Control of Prison Building Projects NAO, 1994 HMSO Publications This NAO report examines the Prison Service's supervision and control of prison building projects following the major rebuilding and modernisation plan of the 1980s. The report is based on a detailed analysis of twenty-three projects: seven new prisons and sixteen major refurbishments. UK
A Desire Named Streetcar: Fantasy and Fact in Rail Transit Planning Pickrell, Don H., 1992 U.S. Department of Transportation This paper assesses the forecast-accuracy for customer numbers and costs in eight U.S. cities where a rail transit project was selected over other options. It considers the accuracy of forecasts that were available to decision makers at the time as well as the empirical outcomes in project operation. Although officials often subsequently revised their projections to reflect higher costs and lower customers, in no case did they reconsider their earlier decision in light of these more realistic estimates. USA
The Costs and Patronage of Rapid Transit Systems Compared with Forecasts
Walmsley, D.A. & Pickett, M.W., 1992
Transport Research Laboratory (TRL) Research Report 352
Ethics and Advocacy in Forecasting for Public Policy Wachs, Martin, 1990 Business & Professional Ethics Journal This study finds that a pattern of successive forecast inaccuracies cannot be explained by operational or technical problems but, rather, were prompted by deception (in particular deception under political coercion): "the use of deception and lying as tactics aimed at getting projects started appears to best explain why costs are highly and systematically underestimated and benefits overestimated". USA
Urban Rail Transit Projects: Forecast Versus Actual Ridership and Costs Pickrell, Don H., 1990 U.S. Department of Transportation This study evaluates the ridership and cost forecasts that led local officials to select ten rail transit projects for construction with federal assistance between 1970 and 1990. It then compares these forecasts with subsequently collected empirical data, identifies divergences between the two and proposes measures to improve the process used to evaluate major transit capital investments. USA
Reasons for Overrun in Public Sector Construction Projects in Nigeria Dlakwa, M.M. and Culpin. M.F., 1990 International Journal Of Project Management 8 (4) 237 - 41 This interim report into construction overruns in developing countries presents an extensive survey from one such country, Nigeria. The major underlying causes of overruns are found to be a lack of prompt payment from agencies to contractors and fluctuation in material, labour and plant costs. ISSN: 0263 -7863 UK
Deception in Dallas: Strategic Misrepresentation in Rail Transit Promotion and Evaluation
Kain, John F., 1990
APA (American Planning Association) Journal, spring 1990, pp.184-196
This report describes the misuse of land-use and ridership forecasts by Dallas Area Rapid Transit (DART). It argues that in an unsuccessful attempt to obtain voter approval for a rail transit system, DART employed unrealistic projections for both customer numbers and alternative uses for the land.
The Performance and Impact of Rail Mass Transit in Developing Countries
Fouracre, P.R.; Allport, R.J. and Thomson, J.M. , 1990
Transport and Road Research Laboratory (TRRL)/UK Department of Transport
Understanding the Outcome of Megaprojects: A Quantitative Analysis of Very Large Civilian Projects
Merrow, Edward W; McDonnell, Lorraine M; Arguden, R. Ylmaz, 1988
RAND
This report analyses the costs and operation of megaprojects by examining 52 public projects ranging in cost from $500 million to over $10 billion (in 1984 dollars). The authors consider whether megaprojects meet their performance goals, whether they typically display poorer outcomes than smaller projects, what factors contribute to good and bad outcomes; and what steps can be taken to minimise future forecasting problems with megaprojects.
The Anatomy of Major Projects: A Study of the Reality of Project Management Morris, Peter W.G. & Hough, George H., 1987 Chichester: John Wiley & Sons This book presents critical analysis of eight large-scale UK and European public projects including the Channel Tunnel, Concorde, the Thames Barrier, Heysham 2 Nuclear Power Station, North Sea Oil and the computerisation of PAYE. UK
Technique vs Advocacy in Forecasting: A Study of Rail Rapid Transit Wachs, Martin, 1986 Urban Resources, 4:1, pp.23-30 This report investigates rail transit as a case study in optimism bias. The author finds that cost underestimation is used strategically to gain approval for projects. USA
Cost overruns in public projects Arditi, David; Akan, Guzin Tarim; Gurdamar, San, 1985 Butterworth & Co. (Publishers) Ltd This study surveyed a large number of Turkish public agencies and contractors to identify causes of cost overruns in the construction industry for public projects undertaken 1970-80. The results indicate that inflationary wage pressures, increases in input costs, construction delays and errors in first estimates were the most important sources for cost overruns. Turkey
Management vs Political Perspectives on Transit Policymaking Wachs, Martin, 1985 Journal of Planning Education and Research, 4:3, pp.139-147 This paper analyses the post-war transformation of the American transit industry from private to public ownership, and examines how political influences came to outweigh management voices in decision-making. Political rather than technical use of forecasts is highlighted as a key detractor from performance under public ownership. USA
Construction Cost Overruns in Electric Utilities: Some Trends and Implications Conaday, H.T. , 1980 Columbus: National Regulatory Research Institute, Ohio State University This report analyses a consistent record of increasing costs and overruns in US public utilities. It seeks to identify answers for two questions: (i) why had plant costs been going up so much in the 1960s and 1970s? and (ii) what could be done about it in the 1980s and beyond? USA
Two British Errors: Their Probable Size and Some Possible Lessons Henderson, P.D., 1977 Oxford Economic Papers, 29:2, pp.159-205 This study examines two major public expenditure programmes, the Concorde aircraft and the Advanced Gas-Cooled Reactor (AGR). The author argues that subsequent empirical cost-benefit analysis suggests that neither project ought to have been approved and sets out to identify the sources of forecasting error in each case. UK
Analysis of Projected vs Actual Costs for Nuclear and Coal-Fired Power Plants Blake, Coleman; Cox, David and Fraize, Willard , 1976 United States Energy Research and Development Administration This study compares projected and actual costs for both nuclear and coal-fired power plants with start of operation dates in the period 1967-1975. It uses these data to compare cost projection accuracy for nuclear and coal-fired power plants and, in particular, accuracy for a common start-of-operation date, allowing for variable construction start dates due to the difference in construction time for the two types of power plant. USA
North Sea Costs Escalation Study, Parts I & II, Energy Paper No.7 Department of Energy Study Group, and Peat Marwick Mitchell & Co and Atkins Planning, 1975 Commissioned by the Secretary of State for Energy in 1975, this report investigates the escalation of costs of developing North Sea oil and gas. It reviews the extent and causes of cost-escalation as well as examining its effects. USA
Cost Overruns in Public Works Merewitz, Leonard, 1973 William Niskanen et al, Benefit Cost and Policy Analysis, Chicago: Aldine Publishers This report examined cost estimates and overrun experience for almost 200 large public projects with the aim of ensuring that contemporary projects - and particularly San Francisco's Bay Area Rapid Transit (BART) - could be placed in an empirical context of inaccurate forecasts. USA
Systematic Errors in Cost Estimates for Public Investment Projects Hufschmidt, Maynard M. and Gerin, Jacques , 1970 Julius Margolis (ed), The Analysis of Public Output, New York: National Bureau of Economic Research, pp.267-315 This paper was one of the first to deal with the extent, nature and causes of error in estimating costs of public investment projects. It examines water-resource investment by the Army Corps of Engineers, Tennessee Valley Authority and Bureau of Reclamation. USA
Errors In Project Cost Estimates Healy, J.M., 1964 Indian Economic Journal, 12 (1), 44-52 This report is concerned with the high degree of error in project cost estimates surrounding investment planning of irrigation and power projects. It sets out original, revised or final cost estimates for thirteen river valley projects, together with the recorded reasons for cost revisions on ten of these projects. India