An Example of Optimism Bias

When I worked on Cost Estimation and Performance Measurement in Canadian Defence: A Principal-Agent-Monitor Perspective , I wanted to learn why political leaders continue to put up with poor cost estimation from project managers in the bureaucracy. I read about optimism bias among project managers who under-estimate costs and over-estimate benefits of their projects.

Daniel Kahneman, in his book Thinking, Fast and Slow , mentions a similar concept that he calls the planning fallacy.

Kahneman also describes an astounding example of poor cost estimation. The case is the construction of the Scottish Parliament Building. In the table below, I show the how the cost estimates changed over time (this is described fully here).

Date	Cost Estimate
24/01/97	10-40m pounds
06/07/98	50-55m pounds
17/06/99	109m pounds
05/04/00	195m pounds
01/11/01	241m pounds
01/10/02	295m pounds
01/07/03	373.9m pounds

The Scottish Parliament Building opened in October, 2005 and a final accounting of all the costs was completed in February 2007 at 414.4m pounds.

Something that Kahneman thinks would help to avoid this kind of under-estimation of costs is an outside view.  I will discuss this concept in my next few blog posts.