In the whitepaper Project Optimism Bias in Capital Investment Decision Making, the author Milvio DiBartolomeo brings us in the world of biases.
The whitepaper is divided into four parts. It starts with a discussion about the need for realistic estimates and assumptions, and clear project plans for mitigating know risks to make the right decisions.
The next part is about project optimism bias and its effect to inaccurately estimate time and cost requirements. The third part put the spotlights on some APMG related guidance like better business cases, managing benefits and the Praxis framework. The last part discusses some techniques to adjust for optimism bias.
The author describes optimism bias as a cognitive bias that causes someone to believe that they themselves are less likely to experience a negative event despite previous experience and lessons captured resulting in overestimate benefits and underestimate total cost of ownership in terms of capital, maintenance, and support.
The following related concepts and biases are explained: planning fallacy, sunk cost fallacy, anchoring, and risk contingency.
To minimize optimism bias prior to full capital investment the following standalone or combined techniques can be used: reference class forecasting, data trust, data range (I assume 3-point estimating?), control points (gate way reviews, project validating reviews, pre-mortem, post-implementation review) and confidence level (cost accuracy: P50 or P80).
Conclusion. The whitepaper definitely helps to get a basic understanding of optimism bias and techniques to minimize it. The P50/P80 was new for me and a little bit difficult to understand. If I read the Defining P50 and P80 manual from the Australian Government Department of finance, it mentions “P80 is a cost that will not be exceeded 80% of the time”. And this is something I can understand but is in my opinion something different than the sentence in the whitepaper “P80 is an indicative total cost of ownership estimate that will not exceed 80% of the timescale for the project which is why having sufficient contingency in place is so important for the sponsoring organization”. But maybe I am wrong, I am not a native English speaker. Next I think in a whitepaper about optimism bias, some words about illusory superiority, the illusion of control and the impact of hindsight bias, self-serving bias and confirmation bias on optimism bias could make sense too.
To download the whitepaper
Talking about risk assessment biases the following overview will help too (source unknown):
|We overestimate risks:(chance and/or impact)||We underestimate these risks|
|You are/feel not in control||You are/feel in control|
|Discussed a lot lately||Not talked about|
|Inflicted by people, on purpose||Natural origin|
|Damage comes directly||Damage in the long term|
|Different, new||Has always been there|
|Event without positive outcome||Event also has positive sides|
|Just happens to you||Choosen, done by free will|
|Concerns other people||Concerns yourself|