Working papers in Transport Economics
Optimism bias in project appraisal: deception or selection?
() and Mogens Fosgerau
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.
Keywords: Cost overruns; Forecast accuracy; Cost-benefit analysis; Appraisal; Selection bias; Winnerís curse; (follow links to similar papers)
JEL-Codes: R40; R42; (follow links to similar papers)
14 pages, June 3, 2013
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- This paper is published as:
Eliasson, Jonas and Mogens Fosgerau, (2013), 'Cost overruns and demand shortfalls: deception or selection?', Transportation Research B, Vol. 57, pages 105-113
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