Optimism bias, Strategic Misinterpretation and Reference Class Forecasting (RCF)
Contents |
Abstract
Most major projects around the world are facing the problems regarding planning and underestimating the costs of a project in the initial phases. These setbacks can cost an enormous sum of money and cause major setbacks of the planned schedule.
The initial planning and make a reliable budget are some om the main organizational managerial skills for a project manager. [1].
But unfortunately, it is today seen that most projects will not fulfill the initial plans and will not met the initial budget goals. It is logically a utopian idea of predicting the unpredictable (known unknowns) or even the things that is impossible to foreseen. And that is why we, as project managers need tools and learn from the past and others.
The Danish professor Bent Flyvbjerg did research into cost overrun of major projects. By sub-dividing the broader aspect of this into the two topics: Optimism Bias and Strategic Misrepresentation Flyvbjerg explored and explained more about the cost and benefit shortfall of major projects. And through further investigation, Flyvbjerg came up with a possible solution: the use of Reference Class Forecasting [2]. The Reference Class Forecasting approach provides a more general overview and “is beneficial for non-routine projects” [3] .
Through reading this article, a clear and succinct explanation of the strategies and ideas mentioned above will be discussed. Furthermore, the idea of Reference Class Forecasting in larger projects will be covered as well as the studies' limitations.
Big idea
Optimism Bias
The term optimism bias was coined by the Nobel prize winner Daniel Kahneman describing the idea that most people consider themselves less likely to experience something unpleasant. This leads to the effect of overconfidence in personal judgements (which can be dangerous / negative for a project in terms of project management). Risks tend to be seen lower and own capabilities better although previous experience shows the opposite (RCF). This can result in project managers undertaking projects with too optimistic expectations about budget, risks and the project scope, which will most likely not be met. [4]. Optimism bias is nearly linked to cognitive bias and applies when human beings think higher of themselves than what is likely or what previous experience has shown. In that way they think that they are less likely to experience car accident or get fired or other bad things. “…post-project and in-project optimism biases have significant effects on the escalation of commitment to failing projects”. [5].
Strategic Misrepresentation
You have a great idea for a book, and you find a publisher who is willing to pay. However, he needs to know more about the time perspective. “When can I have the first manuscript? Can you have it done by the end of next month?” You lower your eyes and gulp. “Of course, no problem” you answer. You have never managed that kind of timeline before, but you are aware that if you tell the truth the publisher will not go with your idea. You do not feel like you just lied. And in official social terms, you did not, you performed the behavior of Strategic Misrepresentation. In larger project this Strategic Misrepresentation can result in underestimating costs, pre-determining and quite likely also overestimating the potential clients' benefits. Applying additional pressure and strain on individuals through manipulation, competing for scarce funds or jockeying for a position all qualify for the same over-arching category. [6]. Note that Strategic Misrepresentation is a form of bias as well, but is used more intentional, and more likely to be a form a technique. When project planners present their cases, they often brighten the numbers regarding the risk and the benefits of their projects. Regarding to Flyvbjerg, they are deliberately deceiving the decision makers, since the projects that look the best on paper will be approved. One of the things that can make a project more vulnerable to Strategic Misinterpretation is “the end date is a few years down the road” [7] No one knows more about large-scale projects than Oxford professor Bent Flyvbjerg. Why are cost and schedule overruns so frequent? Because it is not the best offer overall that wins; it is whichever one looks best on paper. The deceit is socially acceptable, so we don’t get worked up about it. [8] In addition, the report notes that “decision-makers seek short-term recognition and rewards, and the first option represented. [9]
Reference Class Forecasting
Go back to the previous example with the book. How would you decide how much you actually needed? Reference Class Forecasting (RCF) is a used method. The problem can occur when to determine which class to place your project in. Would you compare with all books written? All books within your subject? Books at the same educational level as yours? This is idea and challenge of RCF. RCF is a method of looking to future events by taking relatable situations (in same class so to say) and their previous outcomes. This approach aims to give a much less biased view on a specific event. A study conducted by Daniel Kahneman and Amos Tversky in 1979 shows that when a project is in its beginning stages, judgement of the overall risks of any given events in the project, the total cost and time is biased. This phenomenon was further investigated in 2002 by Nobel Prize winner Daniel Kahneman. The base of this experience was the optimism bias, and the idea that most humans tend to underestimate the time and resources that you will need to achieve your goals. [10] To overcome this problem Professor Bent Flyvbjerg, in 2007, constructed another detailed overview of RCF and incorporating both the 'Outside View' and the 'Inside View'. In doing this, Flyvbjerg created a basic yet efficient system to also further eliminate the overconfidence present in the 'Inside Views' reasoning. RCF process three-step approach states that. [11] It is critical to identify a Reference Class of a past similar project and determining the outcome with the highest potential for the plan by comparing to previous works in the same field of category is fundamental for success.
Application
References
- ↑ PMI:Project Management Institute,Project Management: A guide to the Project Management Body of Knowledge (PMBOK guide), 6th Edition 2017 , Table 1-2.
- ↑ Flyvbjerg, Bent, Curbing Optimism Bias and Strategic Misrepresentation in Planning: Reference Class Forecasting in Practice, (European Planning Studies, 2008), 16. 3-21.
- ↑ Flyvbjerg, B., From Nobel Prize to project management: getting risks right, (Paper presented at PMI® Research Conference: New Directions in Project Management, Montréal, Québec, Canada. Newtown Square, PA: Project Management Institute, 2006).
- ↑ PMI:Project Management Institute,Project Management: A guide to the Project Management Body of Knowledge (PMBOK guide), 6th Edition 2017 , Table 1-2.
- ↑ PMI:Project Management Institute,Project Management: A guide to the Project Management Body of Knowledge (PMBOK guide), 6th Edition 2017 , Table 1-2.
- ↑ PMI:Project Management Institute,Project Management: A guide to the Project Management Body of Knowledge (PMBOK guide), 6th Edition 2017 , Table 1-2.
- ↑ PMI:Project Management Institute,Project Management: A guide to the Project Management Body of Knowledge (PMBOK guide), 6th Edition 2017 , Table 1-2.
- ↑ PMI:Project Management Institute,Project Management: A guide to the Project Management Body of Knowledge (PMBOK guide), 6th Edition 2017 , Table 1-2.
- ↑ PMI:Project Management Institute,Project Management: A guide to the Project Management Body of Knowledge (PMBOK guide), 6th Edition 2017 , Table 1-2.
- ↑ PMI:Project Management Institute,Project Management: A guide to the Project Management Body of Knowledge (PMBOK guide), 6th Edition 2017 , Table 1-2.
- ↑ PMI:Project Management Institute,Project Management: A guide to the Project Management Body of Knowledge (PMBOK guide), 6th Edition 2017 , Table 1-2.
