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From Nobel Prize to Project Management: Getting Risks Right

Bent Flyvbjerg

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Abstract: A major source of risk in project management is inaccurate forecasts of project costs, demand, and other impacts. The paper presents a promising new approach to mitigating such risk, based on theories of decision making under uncertainty which won the 2002 Nobel prize in economics. First, the paper documents inaccuracy and risk in project management. Second, it explains inaccuracy in terms of optimism bias and strategic misrepresentation. Third, the theoretical basis is presented for a promising new method called "reference class forecasting," which achieves accuracy by basing forecasts on actual performance in a reference class of comparable projects and thereby bypassing both optimism bias and strategic misrepresentation. Fourth, the paper presents the first instance of practical reference class forecasting, which concerns cost forecasts for large transportation infrastructure projects. Finally, potentials for and barriers to reference class forecasting are assessed.

New Economics Papers: this item is included in nep-for, nep-ppm and nep-upt
Date: 2013-02
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Published in Bent Flyvbjerg, "From Nobel Prize to Project Management: Getting Risks Right," Project Management Journal, vol. 37, no. 3, August 2006, pp. 5-15

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