April 30, 2012 Vol. 5, Issue 4
Social psychology research has helped shape the United Kingdom’s plan to improve estimates of government project parameters.
In 2003, appraisers within the U.K. government were given guidelines to help curb what’s known as “optimism bias” – the systematic over-estimation of positive outcomes. Inside the “Green Book” – the U.K. Treasury’s guide that sets a framework for the central governments evaluation of policies, programs, and projects a supplementary document introduced steps to making proper adjustments on the estimates to project cost, benefit, and duration. These guidelines were shaped by social psychology research, drawing heavily on the work of social scientist Bent Flyvbjerg, who has been a leading proponent of applying insights about heuristics and bias-related errors to the study of projects.
According to the supplementary memorandum by the National Audit Office (NAO), there are four causes for optimism bias:
- Technical causes, including imperfect information, scope changes and poor management, leading to inadequacies in business cases
- Psychological causes arising from the decision making processes of project promoters and forecasters;
- Economic causes arising from rational incentives to get the project approved to create work; and
- Political-institutional causes, particularly the question of whether cost forecasts are biased to serve the interests of project promoters in getting projects funded and started
The Green Book supplement also uses the work of consulting firm Mott MacDonald, which was commissioned by the U.K. Treasury to review the outcome of large public procurement projects spanning a twenty-year time period. The result provided generic “uplift,” or suggested additional cost estimates for public sector projects that were incorporated into the Green Book. (Read the full review.)
In 2009, the NAO stated that, “It is fair to consider optimism bias in estimates so long as adjustments for optimism bias are based on robust evidence.” The report explained that while good technical planning certainly contributes to combating optimism bias, it doesn’t always fully combat the tendency. Understanding the context (e.g., institutional incentives) in which planning and forecasting is taking place is critical.
Read the full 2009 House of Lords Committee on Economic Affairs supplementary memorandum by the National Audit Office on optimism Bias.
