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Optimism bias in project appraisal: deception or selection?

  • Eliasson, Jonas

    ()

    (KTH Royal Institute of Technology)

  • Fosgerau, Mogens

    (DTU Transport)

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.

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File URL: http://www.transportportal.se/swopec/CTS2013-6.pdf
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Paper provided by CTS - Centre for Transport Studies Stockholm (KTH and VTI) in its series Working papers in Transport Economics with number 2013:6.

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Length: 14 pages
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.
Handle: RePEc:hhs:ctswps:2013_006
Contact details of provider: Postal: Centrum för Transportstudier (CTS), Teknikringen 10, 100 44 Stockholm, Sweden
Web page: http://www.cts.kth.se/

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  1. Thaler, Richard H, 1988. "Anomalies: The Winner's Curse," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 191-202, Winter.
  2. Bent Flyvbjerg, 2013. "Survival of the Unfittest: Why the Worst Infrastructure Gets Built, And What We Can Do about It," Papers 1303.6571, arXiv.org.
  3. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January.
  4. 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.
  5. Juan Dubra & Jean-Pierre Benoit, 2011. "Apparent Overconfidence," Documentos de Trabajo/Working Papers 1106, Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo..
  6. 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).
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