Optimism bias

Optimism bias is the demonstrated systematic tendency for people to be over-optimistic about the outcome of planned actions. People tend to see the future through "rose-colored glasses," as the saying goes. Optimism bias applies to professionals and laypeople alike. Optimism bias arises in relation to estimates of costs and benefits and duration of tasks. It must be accounted for explicitly in appraisals, if these are to be realistic. Optimism bias typically results in cost overruns, benefit shortfalls, and delays, when plans are implemented.

The UK government explicitly acknowledges that optimism bias is a problem in planning and budgeting and has developed measures for how to deal with optimism bias in government (HM Treasury 2003). The UK Department for Transport requires project planners to use so-called "optimism bias uplifts" for large transport projects in order to arrive at accurate budgets for planned ventures (Flyvbjerg and Cowi 2004).

In a debate in Harvard Business Review, between Daniel Kahneman, Dan Lovallo, and Bent Flyvbjerg, Flyvbjerg (2003) – while acknowledging the existence of optimism bias – pointed out that what appears to be optimism bias may on closer examination be strategic misrepresentation. Planners may deliberately underestimate costs and overestimate benefits in order to get their projects approved, especially when projects are large and when organizational and political pressures are high. Kahneman and Lovallo (2003) maintained that optimism bias is the main problem.

Sources and further readings
[http://flyvbjerg.plan.aau.dk/HBR0312ASPUBLISHED.pdf Flyvbjerg, Bent, 2003. "Delusions of Success: Comment on Dan Lovallo and Daniel Kahneman." Harvard Business Review, December Issue, pp. 121-122.]

[http://flyvbjerg.plan.aau.dk/0406DfT-UK%20OptBiasASPUBL.pdf Flyvbjerg, Bent and Cowi, Procedures for Dealing with Optimism Bias in Transport Planning: Guidance Document (London: UK Department for Transport, June 2004). 61 pp.]

[http://flyvbjerg.plan.aau.dk/JAPAASPUBLISHED.pdf Flyvbjerg, Bent, Mette K. Skamris Holm, and Søren L. Buhl, "Underestimating Costs in Public Works Projects: Error or Lie?" Journal of the American Planning Association, vol. 68, no. 3, Summer 2002, pp. 279-295.]

HM Treasury, Supplementary Green Book Guidance: Optimism Bias (London: HM Treasury, 2003).

Kahneman, Daniel and Dan Lovallo, 2003. "Response to Bent Flyvbjerg." Harvard Business Review, December Issue, p. 122.

Lovallo, Dan and Daniel Kahneman, 2003. "Delusions of Success: How Optimism Undermines Executives' Decisions," Harvard Business Review, July Issue, pp. 56-63.