Curbing Optimism Bias and Strategic Misrepresentation in Planning

02Jul16

Reference class forecasting is based on theories of planning and decision-making under uncertainty that won Princeton psychologist Daniel Kahneman the Nobel prize in econ- omics in 2002 (Kahneman & Tversky, 1979a, 1979b; Kahneman, 1994). As part of their work, Kahneman and Tversky uncovered a systematic fallacy in planning and decision-making under which people underestimate the costs, completion times, and risks of planned actions, whereas they overestimate the benefits of the same actions. This would later be known as “the planning fallacy”, and Kahneman argued that this fallacy stems from actors taking an “inside view” focusing on the constituents of the specific planned action rather than on the outcomes of similar actions already completed. Kahneman also identified a cure to the fallacy, namely taking an “outside view” on planned actions using distributional information from previous, similar ventures. Distribu- tional information is here understood as data on variation from the expected outcome for instance as expressed in common statistical measures such as standard deviation and var- iance. Doing so in a systematic fashion is called “reference class forecasting”. A reference class forecast of a given planned action is based on knowledge about actual performance in a reference class of comparable actions already carried out.

Kahneman has never developed his innovative ideas about the planning fallacy and outside view for use in practical planning and decision-making, and neither has anyone else to the knowledge of the present author. In what follows, the focus will be on how this may be done. Where Flyvbjerg et al. (2005) briefly outlined the idea of reference class forecasting, this paper details the method and presents the first instance of reference class forecasting in practical policy and planning. The emphasis will be on transportation policy and planning, because this is where the first instance of reference class forecasting took place. It should be mentioned at the outset, however, that comparative research shows that the problems, causes, and cures identified for transportation apply to a wide range of other project types including sports arenas, exhibit and convention centres, concert halls, museums, urban renewal, power plants, dams, water projects, information technology (IT) systems, oil and gas extraction projects, and aerospace projects (Altshuler & Luberoff, 2003; Flyvbjerg et al., 2003, pp. 18–19; Flyvbjerg et al., 2002, p. 286; Flyvbjerg, 2005a, 2005b).

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