Optimism bias in project appraisal: deception or selection?
A number of highly cited papers by Flyvbjerg and associates have shown that ex-ante infrastructure appraisals tend to be overly optimistic. Ex post evaluations indicate a bias where investment cost is higher and demand lower on average than predicted ex ante. These authors argue that the bias must be attributed to intentional misrepresentation by project developers. This paper shows that the bias may arise simply as a selection bias, without there being any bias at all in predictions ex ante, and that such a bias is bound to arise whenever ex ante predictions are related to the decisions whether to implement projects. Using a database of projects we present examples indicating that the selection bias may be substantial. The examples also indicate that benefit-cost ratios remains a useful selection criterion even when cost and benefits are highly uncertain, gainsaying the argument that such uncertainties render cost-benefit analyses useless.
|Date of creation:||03 Jun 2013|
|Date of revision:|
|Publication status:||Published as Eliasson, Jonas and Mogens Fosgerau, 'Cost overruns and demand shortfalls: deception or selection?' in Transportation Research B, 2013, pages 105-113.|
|Contact details of provider:|| Postal: Centrum för Transportstudier (CTS), Teknikringen 10, 100 44 Stockholm, Sweden|
Web page: http://www.cts.kth.se/
References listed on IDEAS
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- Bent Flyvbjerg, 2013.
"Survival of the Unfittest: Why the Worst Infrastructure Gets Built, And What We Can Do about It,"
- Bent Flyvbjerg, 2009. "Survival of the unfittest: why the worst infrastructure gets built--and what we can do about it," Oxford Review of Economic Policy, Oxford University Press, vol. 25(3), pages 344-367, Autumn.
- Jean‐Pierre Benoît & Juan Dubra, 2011.
Econometric Society, vol. 79(5), pages 1591-1625, 09.
- Heckman, James J, 1979.
"Sample Selection Bias as a Specification Error,"
Econometric Society, vol. 47(1), pages 153-61, January.
- Lundberg, Mattias & Jenpanitsub, Anchalee & Pyddoke, Roger, 2011. "Cost overruns in Swedish transport projects," Working papers in Transport Economics 2011:11, CTS - Centre for Transport Studies Stockholm (KTH and VTI).
- Thaler, Richard H, 1988. "Anomalies: The Winner's Curse," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 191-202, Winter.
- Nellthorp, J. & Mackie, P. J., 2000. "The UK Roads Review--a hedonic model of decision making," Transport Policy, Elsevier, vol. 7(2), pages 127-138, April.
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