PROJECT OVERRUNS?

“There may be powerful economic and prestige-related incentives to under-estimate costs and over-estimate benefits when people try to sell projects. For example, studies based on data from several hundred large transportation infrastructure projects in twenty nations and five continents found evidence that in a number of cases, project promoters and forecasters of billion-dollar projects intentionally misrepresented the costs, benefits and risks of projects to get them approved” Peter Bevelin

“Managers tend to be reluctant to look at the results of the capital projects or the acquisitions that they proposed with great detail only a year or two earlier to a board. And they don’t want to actually stick the figures up there as to how the reality worked out relative to the projections. That’s human nature.” Warren Buffett

“Overly optimistic forecast of the outcome of projects are found everywhere. Amos and I coined the term “planning fallacy” to describe plans and forecasts that 1) are unrealistically close to best-case scenarios and 2) could be improved by consulting the statistics of similar cases. Errors in the initial budget are not always innocent. The authors of unrealistic plans are often driven by the desire to get the plan approved – whether by their supporters or by a client – supported by the knowledge that projects are rarely abandoned unfinished merely because of over-runs in costs or completion times. In such cases, the greatest responsibility for avoiding the 'planning fallacy' lies with the decision makers who approve the plan. If they do not recognise the need for an ‘outside view’, they commit a planning fallacy” Daniel Kahneman

“The ‘Outside view’ is implemented by using a large database, which provides information on both plans and outcomes for hundreds of projects all over the world, and can be used to provide statistical information about the likely overruns of costs and time, and about the likely underperformance of projects of different types” Daniel Kahneman

“The prevalent tendency to underweight or ignore distributional information is perhaps the major source of errors in forecasting. Planners should therefore make every effort to frame the forecasting problem so as to facilitate utilizing all the distribution information that is available” Bent Flyvbjerg

“When forecasting the outcomes of risky projects, executives too easily fall victim to the ‘planning fallacy’. In its grip, they make decisions based on delusional optimism rather than on rational weighting of gains, losses and probabilities. They overestimate benefits and under-estimate costs. They spin scenarios of success while overlooking the potential for mistakes and miscalculation. As a result, they pursue initiatives that are unlikely to come in on budget or on time or to deliver the expected returns – or even to be completed” Daniel Kahneman

“In project management, Bent Flyvberg has shown firm evidence that an increase in the size of projects maps to poor outcomes and higher and higher costs of delays as a proportion of the total budget. But there is a nuance: it is the size of the segment of the project that matters, both the entire project – some projects can be divided into pieces, not others. Bridge and tunnel projects involve monolithic planning, as these cannot be broken up into small portions; their percentage costs overruns increase markedly with size. Same with dams. For roads, built by small segments there is no serious size effect, as the project managers incur only small errors and can adapt to them. Small segments go one small error as the time, with no serious role for squeezes” Nassim Nicholas Taleb

“Black swan effects are necessarily increasing, as a result of complexity, interdependence between parts, globalization, and the beastly thing called ‘efficiency’ that makes people now sail too close to the wind. Add to that consultants and business schools. One problem somewhere can halt the entire project – so the projects tend to get weak as the weakest link in their chain (an acute negative convexity effect)” Nassim Nicholas Taleb

“No psychologist who has discussed the ‘planning fallacy’ has realised that, at the core, it is not essentially a psychological problem, not an issue with human errors; it is inherent to the non-linear structure of the projects. Just as time cannot be negative, a three month project cannot be completed in zero or negative time. So, on a timeline going left to right, errors add to the right end, not the left end of it. If uncertainty were linear we would observe some projects completed extremely early. But this is not the case” Nassim Nicholas Taleb