Scandinavian Working Papers in Economics
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CTS - Centre for Transport Studies Stockholm (KTH and VTI)
CTS - Centre for Transport Studies Stockholm (KTH and VTI) CTS - Centre for Transport Studies Stockholm (KTH and VTI)
Working papers in Transport Economics

No 2013:6:
Optimism bias in project appraisal: deception or selection?

Jonas Eliasson () 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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