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Optimism bias in project appraisal: deception or selection?

Author

Listed:
  • Eliasson, Jonas

    () (KTH Royal Institute of Technology)

  • Fosgerau, Mogens

    (DTU Transport)

Abstract

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.

Suggested Citation

  • Eliasson, Jonas & Fosgerau, Mogens, 2013. "Optimism bias in project appraisal: deception or selection?," Working papers in Transport Economics 2013:6, CTS - Centre for Transport Studies Stockholm (KTH and VTI).
  • Handle: RePEc:hhs:ctswps:2013_006
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    File URL: http://www.transportportal.se/swopec/CTS2013-6.pdf
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    References listed on IDEAS

    as
    1. Jean‐Pierre Benoît & Juan Dubra, 2011. "Apparent Overconfidence," Econometrica, Econometric Society, vol. 79(5), pages 1591-1625, September.
    2. 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.
    3. Thaler, Richard H, 1988. "Anomalies: The Winner's Curse," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 191-202, Winter.
    4. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
    5. 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.
    6. Juan Dubra & Jean-Pierre Benoit, 2011. "Apparent Overconfidence," Documentos de Trabajo/Working Papers 1106, Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo..
    7. 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).
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Cost overruns; Forecast accuracy; Cost-benefit analysis; Appraisal; Selection bias; Winner’s curse;

    JEL classification:

    • R40 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - General
    • R42 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government and Private Investment Analysis; Road Maintenance; Transportation Planning

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