Available online at www.sciencedirect.


International Journal of Project Management 31 (2013) 760 – 774

Quality control and due diligence in project management: Getting decisions
right by taking the outside view ☆
Bent Flyvbjerg
BT Centre for Major Programme Management, Saïd Business School, University of Oxford, United Kingdom
Received 15 May 2012; received in revised form 2 October 2012; accepted 16 October 2012

This paper explores how theories of the planning fallacy and the outside view may be used to conduct quality control and due diligence in
project management. First, a much-neglected issue in project management is identified, namely that the front-end estimates of costs and benefits –
used in the business cases, cost–benefit analyses, and social and environmental impact assessments that typically support decisions on projects –
are commonly significantly different from actual ex post costs and benefits, and are therefore poor predictors of the actual value and viability of
projects. Second, it is discussed how Kahneman and Tversky's theories of the planning fallacy and the outside view may help explain and remedy
this situation through quality control of decisions. Third, it is described what quality control and due diligence are in the context of project
management, and an eight-step procedure is outlined for due diligence based on the outside view. Fourth, the procedure is tested on a real-life,
multibillion-dollar project, organized as a public–private partnership. Finally, Akerlof and Shiller's recent discussion in economics of “firing the
forecaster” is discussed together with its relevance to project management. In sum, the paper demonstrates the need, the theoretical basis, a practical
methodology, and a real-life example for how to de-bias project management using quality control and due diligence based on the outside view.
© 2012 Elsevier Ltd. APM and IPMA. All rights reserved.
Keywords: Quality control; Due diligence; Front-end management; Planning fallacy; Outside view; Forecasting; Cost–benefit analysis; Ex-post analysis; Daniel

1. Introduction
1.1. “Third Wave” research
The 2011 Oxford Handbook of Project Management identifies
a “third wave” in project management research characterized by a
positioning of the management of projects as a vital part of general
management (Morris et al., 2011:3). With projects taking center
stage as delivery model for products and services in most

☆ The author wishes to thank Daniel Kahneman for generously taking the time
to discuss in several meetings and correspondence the idea of quality control
and due diligence of decision making, based on theories of the planning fallacy
and the outside view. The author also wishes to thank Alexander Budzier, Ole
Jonny Klakegg, Jens Krause, Jürgen Laartz, Petter Næss, and Martin Wachs for
their valuable comments on earlier versions of this paper. Research for the paper
was supported in part by The Danish Council for Strategic Research.
E-mail address: bent.flyvbjerg@sbs.ox.ac.uk.
0263-7863/$36.00 © 2012 Elsevier Ltd. APM and IPMA. All rights reserved.

organizations, project management can no longer be seen as a
specialist subcategory of management brought to bear on special
cases, but must instead be seen as a core business activity, vital to
organizations as a whole. As part of this development from specific to general management, theory has developed from projectbased theory to more general theory, substantially strengthening
the academic base of project management, according to Söderlund
(2011) and Turner et al. (2011). The present paper is intended as a
contribution to, first, the third wave's focus on general management and, second, fortifying the theoretical basis of project
management by focusing on general theory and its importance to
project management.
Winter et al. (2006), Williams et al. (2009), Edkins et al.
(2012), and many others have identified high-quality front-end
management as crucial to good project delivery. The front-end
has been singled out as the perhaps most important stage in the
overall project cycle in securing the success of projects, or
avoiding failure. Within the front-end, estimating expected outcomes of projects and evaluating whether they justify investing

and maybe the most consequential one. whereas people overestimate the benefits of the same actions. 2010).” 2 Kahneman (1994) argued that this fallacy stems from actors taking an “inside view” focusing on the constituents of the specific planned action rather than on the outcomes of similar actions already completed. As explained in Flyvbjerg (2006). and that any corrective prescription should reflect this. Merrow. the paper brings Nobel prize-winning economic theory about the planning fallacy and the outside view. Later. The idea proposed in the present article is: 1. 2006. and the go-decision in projects. Following and expanding upon Buehler et al. because ideally estimates inform the decision of whether projects will go ahead or not. 2010). Gardener and Moffat. 2011. (1994). due diligence. which are typically also key in decision making on major projects.. namely that ex ante estimates of costs and benefits – used in the business cases. such business cases. 1979b). Here. developed by Daniel Kahneman and Amos Tversky. the quality of estimates will highly influence whether a project is deemed successful or not in meeting its objectives. however. and which also suffer from the problem of predicted impacts often being very different from actual ones (Flyvbjerg et al. The planning fallacy and the outside view Flyvbjerg et al. in addition to in schedule estimates. the term has been used to also explain error and bias in cost and benefit estimates. 1 Furthermore. and risk assessment in project management does not cover this particular approach to improved decision making (Breakwell. If they would simply collect data and calculate the average of how long it took 10–15 fellow students in last year's class in the same program they would arrive at a much more accurate estimate. Dantata et al. 2009). Previous studies have documented a much-neglected topic in research and practice. (2002. an investment. (1994) originally used the term "planning fallacy" to explain error and bias in schedule estimates. and especially whether the estimated costs and benefits for that project are likely to materialize. the business case. Specifically. as pointed out by Edkins et al. and social and environmental impact assessments that typically support decisions on projects – are often significantly different from actual ex post costs and benefits (Flyvbjerg. in their Nobel-prize-winning work on decision making under uncertainty. not 1 This is assuming that the project has not fallen victim to lock-in at an earlier stage and that promoters are genuinely interested in understanding outcomes. (2002) showed that forecasts of costs and benefits of major projects are generally highly inaccurate and biased. Below we will see how doing so in a systematic fashion may be used for performing due diligence of cost and benefit estimates. and 2. according to Kahneman. Distributional information is here understood as data on variation from the average outcome.B. and social and environmental impact assessment are for a given project. to develop quality control and due diligence to establish just how reliable. cost–benefit analyses. Moløkken and Jørgensen. 2012. 2. Kahneman also identified a cure to the fallacy. for instance where promoters have locked in on a certain design or construction interests dominate operations interests (Cantarelli et al. 2008. 2007. and risks of planned actions. manifesting bias rather than confusion. but also in social and environmental impact assessments. to decide the implications of this for the project go-ahead. This work shows that errors of judgment are often systematic and predictable rather than random. As a result. including (a) the average outcome in sets of such ventures and (b) distributional information about outcomes. The existing literature on quality control.. .. 2006. Due diligence is generally an evaluation of the assets of a company. Yet. De Meyer et al.. which consists in using experience from previous similar ventures already completed. cost–benefit analyses. Perminova et al.. 2008. trying to understand and estimate the task inside-out. Kahneman and Tversky (1979a. Lovallo and Kahneman (2003:58) would later call such common behavior the “planning fallacy. Due diligence is thus developed to be used as “quality control” of business cases.. The thesis is. 2002:49–64). or a person. Williams et al. Theory and methodology are developed at a level of generalization sufficiently high to allow their use. For instance. cost–benefit analysis. and for uncovering just how biased and error-prone such estimates typically are. 2002. Scott et al. It is the purpose of the present paper to help fill this gap in the literature. Fischoff. 761 only in business cases and cost–benefit analyses. or unreliable. 2009). Flyvbjerg / International Journal of Project Management 31 (2013) 760–774 in a given project is a key activity. Winch. 2005) and Flyvbjerg et al. for instance as expressed in common statistical measures such as standard deviation and variance. 2011. nor about how the quality of estimation may be improved.. argued that such inaccuracy is caused by a systematic fallacy in decision making causing people to underestimate the costs. (2012:6) there is little about this in the research literature. cost–benefit analyses. due diligence is specifically understood as an evaluation of the costs and benefits deriving from investing in a given project. Kahneman and Tversky did not develop their theories with these purposes in mind. completion times. namely taking an “outside view” on planned actions. It also shows that many errors of judgment are shared by experts 2 Buehler et al. students asked how long they will take to write their thesis typically significantly underestimate the time. and social and environmental impact assessments are typically poor predictors of the actual value and viability of projects and cannot be trusted as a basis for informed decision making. 2003. which is not always the case. Data to test the thesis are drawn from a large database on estimated and actual costs and benefits in major projects and programs. thinking about the outside view was originally developed to compensate for the type of cognitive bias that Kahneman and Tversky had found in their work. Flyvbjerg and Stewart. These findings have been verified by other similar research (Arena et al. that their theories will be highly effective in quality control and due diligence of planned projects and thus in improving decision making on projects. The theoretical and methodological foundations of the outside view were first described by Kahneman and Tversky (1979b). 2002.. to bear upon quality control and due diligence in the management of projects.

according to Kahneman and Tversky. the outside view. Human bias is bypassed. the outside view will produce more accurate results. imagine events. But for most projects. however. Finally the work demonstrates that errors remain compelling even when one is fully aware of their nature. 1994. In contrast. according to Kahneman and Tversky (1979b:314). are both non-routine locally and use well-known technologies that have been tried out elsewhere. In the outside view project planners and forecasters are not required to make scenarios. according to Kahneman and Tversky. being based on historical precedent. That is because the outside view bypasses cognitive and political biases such as optimism bias and strategic misrepresentation and cuts directly to outcomes (Flyvbjerg. enable one to identify situations in which the normal faith in one's impressions must be suspended and in which judgment should be controlled by a more critical evaluation of the evidence. most individuals and organizations – including project managers. However. Due diligence is a method for systematically and reliably assessing how large biases are and for de-biasing business cases and other forecasts. This is the conventional and intuitive approach. “The analysts should therefore make every effort to frame the forecasting problem so as to facilitate utilizing all the distributional information that is available. biases in decision making are persistent and de-biasing will not happen of its own accord. The thought of going out and gathering simple statistics about related projects seldom enters a planner's mind. Human judgment. Awareness may. which both groups of subjects were aware of. which is logically impossible. To be sure..762 B. as shown by the simple experiments conducted by Kahneman and others. may fail to predict extreme outcomes. the potentials for and barriers to using the outside view will be different in situations where (1) optimism bias is the main cause of inaccuracy as compared to situations where (2) strategic misrepresentation is the chief reason for inaccuracy. Even so. is biased. For this reason. their forecasts become significantly more accurate. This simple diversion into relevant outside-view information. However. or gauge their own and others' levels of ability and control. For example. cost engineers. like those described below. the outside view is much more likely to produce a realistic estimate. The comparative advantage of the outside view will be most pronounced for non-routine projects. a group of students enrolling at a college were asked to rate their future academic performance relative to their peers in their major. It is in the planning of such new efforts that the biases toward optimism and strategic misrepresentation are likely to be largest. The outside view was originally developed to mitigate optimism bias. these students expected to perform better than 84% of their peers. for instance the introduction of new and unfamiliar technologies. most projects. 2003:61). but it may help mitigate any type of bias. two types of explanation best account for forecasting inaccuracy: optimism bias and strategic misrepresentation. 2002). When both forecasting methods are applied with equal skill. choosing the right class of comparative past projects would become more difficult when planners are forecasting initiatives for which precedents are not easily found. it is demonstrated how project managers and decision makers may use the outside view to perform due diligence of business cases. cost–benefit analyses. including strategic bias. but it is significantly more realistic than the forecast made by the first group (Lovallo and Kahneman. understood as projects that managers and decision makers in a certain organization or locale have never attempted before – like building greenfield infrastructure and plant or catering to new types of demand. those that lie outside all historical precedents. to bring to bear what one knows about it. Undoubtedly.” say Kahneman and Tversky (1979b:316). incentives and methods for quality control of projects and decisions must be in place. For de-biasing to take place. 3. Such projects would.. 2007a). and social and environmental impact assessments for planned ventures. Another group of incoming students from the same major were asked about their entrance scores and their peers' scores before being asked about their expected performance. 2007a). including in developing business cases and forecasts for projects. therefore. This may be considered the single most important piece of advice regarding how to increase accuracy in business cases and forecasting through improved methods (as opposed to through improved incentives. The contrast between inside and outside views has been confirmed by systematic research (Buehler et al. Using such distributional information from other ventures similar to that being forecasted is taking an outside view and it is the cure to the planning fallacy. While understandable. who use the term “planner” to denote any individual or organization contemplating future actions. Gilovich et al. Below. With Kahneman and Tversky (1979b) it is argued that the prevalent tendency for humans to underweigh or ignore distributional information is perhaps the major source of error in forecasting and decision making. because the outside view bypasses such bias by cutting directly to empirical outcomes and building conclusions about future events on these. The research shows that when people are asked simple questions requiring them to take an outside view. reduced the second group's average expected performance ratings by 20%. The forecasts were biased by overconfidence. be particularly likely to benefit from the outside view. Here it is argued that due diligence is a method for such critical evaluation. Thus awareness of a perceptual or cognitive illusion does not by itself produce a more accurate perception of reality. Due diligence as described below is a method for consistently taking an outside view on planned actions. Flyvbjerg / International Journal of Project Management 31 (2013) 760–774 and laypeople alike. Potentials and barriers for the outside view As argued in Flyvbjerg (2007a). that is. a focus on inside details will lead to inaccuracy and poor decisions. and especially major ones. trying to predict the events that will influence its future. paying special attention to its unique or unusual features. On average. and risk departments – are inclined to adopt the inside view in planning new projects. planners' preference for the inside view over the outside view is unfortunate. see Flyvbjerg. so they cannot get all these things wrong. That is still overconfident. We therefore need to distinguish between these two types . The traditional way to think about a complex project is to focus on the project itself and its details.

What is due diligence? Due diligence is a term used for the performance of an investigation of a business. Flyvbjerg / International Journal of Project Management 31 (2013) 760–774 of situation when endeavoring to apply the outside view in practice. numbers regarding performance. Common examples of due diligence are the process through which a potential buyer evaluates a target company or its assets for acquisition or the process through which a potential investor evaluates a major investment for its costs and benefits. cost and benefit forecasters are faced with the following two basic questions: 1. because no one has reason to be against a methodology that will improve their forecasts. Below. Here. in order to beat the competition. In the second type of situation – where strategic misrepresentation is the main cause of inaccuracy – differences between estimated and actual costs and benefits are best explained by political and organizational pressures. The higher the stakes. for instance by allocating forecasting risk directly to investors so they will carefully scrutinize the accuracy of forecasts before deciding to invest in a project. if biased. 2006). when students were asked to take into account outside-view information. Such bodies would need the outside view or similar methodology to do their work. The students made honest mistakes. 4 4. and thus create room for the outside view. 2008. Bruzelius. which produced honest.or underestimated and by how much. Biased forecasts serve strategic purposes that dominate the commitment to accuracy and truth. To perform due diligence of the estimated costs and benefits for a planned project involves an evaluation of whether the cost and benefit forecasts in the project's business case are likely to be over. There is no incentive for the individual city to debias its forecasts. an investment. In this type of situation – when forecasters are honestly trying to gauge the future – the potential for using the outside view to improve outcomes is good. the students mentioned above. say. 5. 2007. the likelihood that the value will be. and risks (Bing. focus will be on the process through which a potential investor. This again underscores the point that improved methods and measures of accountability must go hand in hand if the attempt to arrive at more accurate forecasts is to be effective.. Unless all other cities also debias. Here managers and forecasters would still need the outside view if accuracy were to be improved. The theory behind due diligence holds that performing this type of investigation contributes significantly to informed decision making by enhancing the amount and quality of information available to decision makers and by ensuring that this information is systematically used to deliberate in a reflexive manner on the decision at hand and all its costs. Cities compete fiercely for approval and for scarce national funds for such projects. We have no reason to believe that the students deliberately misrepresented their estimates. the assumption of innocence regarding estimates typically cannot be upheld. Projects that were shown to have inflated benefit-cost ratios would not receive funding or would be placed on hold. and barriers to using it will be low. or a person with a certain standard of care. and Rothengatter (2003) and Flyvbjerg et al. 2011:354). for example. may evaluate a major planned investment for its costs. and pressures are strong to present business cases as favorably as possible. . benefits. including the design and implementation of incentive structures that would make decision making well-informed and accountable. incentives must be aligned to reward accurate forecasts and punish inaccurate ones. 3 Finally. we saw that the accuracy of their estimates improved significantly. in the case study of the A-Train. and risks. 2006). to curb strategic forecasts governments and other funders may have to make the outside view mandatory and make funding contingent on the application of this particular methodology. However. but quite the opposite. 10 or 50% lower or higher than the expected value? 3 The wider issue of the politics of business case development are detailed in Flyvbjerg. who were asked to estimate their future academic performance relative to their peers. Like other forecasters. Due diligence may be a legal obligation. benefits. What is the variance of the expected value. but managers and forecasters may not be interested in this because inaccuracy is deliberate. and vice versa. including banks and independent bodies such as national auditors or independent analysts. for example.B. And. better 763 methods alone will not solve the problem. UK Department for Transport. the individual city would lose out in the competition for funds. Consider. the more pronounced will be the need for measures like these. because they had no interest in doing so and were not exposed to pressures that would push them in that direction. 4 The existence of strategic misrepresentation does not exclude the simultaneous existence of optimism bias. that is. Managers are on record confirming that this is a common situation (Flyvbjerg and Cowi. Consider. public or private. The result is the same as in the case of optimism: managers promote ventures that are unlikely to perform as promised. In order to lower barriers. What is the expected value of the variable being forecasted (here costs and benefits of the project in question)? 2. the case of urban rail. it is realistic to expect such co-existence in forecasting in large and complex ventures and organizations. Under these circumstances the potential for using the outside view is low – the demand for accuracy is simply not present – and barriers are high. In the first type of situation – where optimism bias is the main cause of inaccuracy – we may assume that managers and forecasters are making genuine mistakes and have an interest in improving accuracy. Chapman. as has been done in the UK and Denmark (Danish Ministry for Transport. promoters' forecasts should be made subject to quality control and due diligence by other parties. (2005). i. we will see an example of how this works. indeed. Managers and forecasters will be welcoming the outside view. Furthermore. But the causes are different as are possible cures. but the term more commonly applies to voluntary investigations. Better methods need to go hand in hand with better incentives. 2004:36–58). with low costs and high benefits. and the higher the level of political and organizational pressures. because any method can be gamed (Winch and Maytorena. Here.e. In fact. In the next section we will see what quality control and due diligence based on the outside view might look like in practice.

tens of thousands of parking spaces may be built that may not be needed. because there was no need for them. between local and national government and between several private investors. air fares change and influence rail patronage. and especially to parties who were asked to take on demand risk as part of their investment. length of station platforms. e. it is crucial to focus on the quality of demand forecasts. The outside view. or fuel prices change and affect demand for highways. The question of whether the project's demand forecast may be over. at a cost of tens of thousands of dollars per space. Identifying further cost and benefit risks. 4. If ridership forecasts are inflated. because such risk typically needs to be allocated. Below. So. increasing viability risks. namely a planned multibilliondollar rail investment project. made for the A-Train final business case.1 million passengers for the opening year. In public–private partnerships there is special focus on demand risk.or underestimated and by how much. for rail for instance number of tracks. 6. 5. This may be called inherent uncertainty. too. Concluding as to whether the forecast is over. Due diligence is aimed at reducing uncertainty by getting a clear picture of the size and types of uncertainty that apply to specific decisions and forecasts. against which performance may be measured. 2005:132). and size of stations. It should be emphasized that due diligence and quality control is not about eliminating uncertainty from business cases and forecasts. forecasts. due diligence is used to answer the question of whether the A-Train's demand forecast may be over. The project has been anonymized for reasons of confidentiality and is here called the “A-Train. Soliciting comments from the forecaster. The Case of the A-Train As part of step one – identification and description of the forecast to be evaluated – the sponsors' demand forecast for the A-Train is summarized in Table 1 and explained in the main text. In what follows.g.. However. Uncertain events will always influence actual outcomes and thus the accuracy of forecasts. Due diligence in practice This section considers a case of typical state-of-the-art forecasting for a major capital project. Each of the eight steps in due diligence listed above are covered in turn below. 7. in areas of low population density. Demand forecasts are important to project managers and decision makers because they influence both cost and revenue risks of projects. This type of delivery model is today common for major infrastructure development in many parts of the world. the issues and methodology covered are general and apply to all types of costs and benefits and to social and environmental impacts. station platforms too long for the shortened trains. where size and allocation of demand risk was a key issue. for the A-Train.or underestimated. Flyvbjerg / International Journal of Project Management 31 (2013) 760–774 To perform due diligence of a given cost or benefit forecast – i. is brought into due diligence by establishing the benchmark used in due diligence on the basis of performance in a group of projects similar to the one being investigated in the due diligence. An inflated passenger forecast for Bangkok's US$2 billion Skytrain resulted in a greatly oversized system. Identification and description of the business case or forecast to be evaluated. The due diligence was initiated by an investor who was invited to fund the A-Train and to take on a substantial part of the project's demand risk. The sponsors and their forecaster considered this forecast to be the expected outcome taking into account the balance of . The sponsors' demand forecast. (Flyvbjerg et al. Checking the forecaster's track record from other. and second. Given the high cost of major infrastructure projects. data for those types of projects would simply have to be substituted for the rail data in both the forecast to be evaluated and in the benchmark used to carry out the evaluation. Using the benchmark to evaluate performance in the forecast in question. Finally.. although the data presented are particular to rail. and the limited availability of resources. many trains and cars sitting in the garage. The impact of the inflated forecast is that revenues will be lower than expected and costs higher than necessary. etc.or underestimated – is equivalent to judging how well these two questions have been addressed by the forecasters. That is impossible. first. Nevertheless. 8. similar.764 B. For reasons of data and presentation. number and length of trains. we will discuss accuracy in cost and benefit forecasting and how it may be improved. to evaluate whether the forecast is likely to be over.7 million passengers per year ten years later. Forecasts affect basic design decisions because they determine capacity and size of the facilities and systems being planned. rail stations may require extensive car parking. the methodology used is general. Establishing the expected outcome. 5. it is demonstrated how this may be done in practice. the irreversibility of decisions. 2. Establishing a benchmark that represents the outside view. For a given cost or benefit forecast. For instance. Below it is shown how this is done in practice and we will see how each of the eight steps is carried out. predicted 14. Again. For the method to work for other types of projects than rail. the focus is on benefits and demand.. much uncertainty – and especially bias – is not inherent but is caused by avoidable error and strategic behavior. Similarly. 3. the specific steps involved in performing due diligence based on the outside view are: 1. between the public and private sectors. That would mean piling cost upon cost to meet fictional demand. between individual parties within those sectors.or underestimated therefore became central to the project management process. growing to 17. with less than half of the projected passengers. terminals too large. as described above.” The delivery model for the A-Train is a government-sponsored public–private partnership with a private concessionaire responsible for building and operating the service.e. 6.

using best practice we would not know how often best practice is actually achieved in forecasting and how far from best practice forecasts usually are. This is because benchmarking against best practice would give us only one piece of 765 27 rail projects 25 rail projects. the 2005 sample was expanded to cover 475 transportation infrastructure projects of which 62 are rail projects that are comparable to the A-Train. Flyvbjerg / International Journal of Project Management 31 (2013) 760–774 Table 1 Sponsors' demand forecast for the A-Train. as shown in Table 1. For instance. the sponsors of the A-Train estimated a five-year ramp up profile for demand.4% lower than forecasted demand. i. 2005).33 . and ramp up profile are shown as estimated by the sponsors' forecaster.41 0. from zero error. For a detailed description of the data. Just as important. 62 rail projects 61 rail projects.B. (2005). Thus the sponsors considered the chance to be 50:50 for each of the events that the forecast would be exceeded and not be reached. excluding statistical outliers Average accuracy Standard deviation 0. See main text for discussion. in forecasting it is not a useful benchmark for due diligence.e. Table 3 Accuracy in 62 rail demand forecasts. including the A-Train forecast presented above. Best or average practice as benchmark? Step two of due diligence is establishing a benchmark against which individual forecasts may be measured. As an estimate of variance of the expected outcome. meaning a forecast that is neither too high nor too low. The dataset is the largest of its kind.61 0. (Source: Flyvbjerg et al. initial operational hiccups. risk) Standard deviation: 9. to produce a forecast with zero or little error. This is equivalent to rail demand forecasts being overestimated by 106% on average. beginning with 60% of the forecast in Year 1 increasing to 100% in Year 5. In cost and benefit forecasting. The study is based on a sample of 210 transportation infrastructure projects of which 27 are rail projects. standard deviations are high indicating a high risk of large forecasting errors. The sponsors stated they had 95% confidence that these figures would be exceeded. according to the forecasters.. This is perhaps the most consequential step of the due diligence exercise. The data claimed to support the ramp up profile was not provided with the forecast. the sponsors presented what they called a “downside case” for demand and revenues. Although best practice is clearly an ideal to be strived for. after 10 years Downside case (variance. in the sense they were built using technologies and under regulatory regimes that are comparable to those that apply to the A-Train. (Source: Flyvbjerg database). namely how far the forecast in question is from the ideal. the average accuracy of the demand estimate was 0. (2005) contains the most comprehensive study that has been published so far of accuracy in travel demand forecasting.7 million passengers. with 15% lower demand and revenues than the main forecast. In this case we would obtain none of the distributional information that Kahneman and Tversky argue is crucial for understanding forecasting problems and getting forecasts right. In what follows.1%. have been included in the set. 7..1 million passengers. Finally. Accuracy is measured as actual divided by forecast demand for the first year of operations. i. Table 2 shows the main results from the study as regards rail. Measured by sample size.28 information. first year Predicted demand (expected outcome) 17. with and without 2 statistical outliers. and the like. see Flyvbjerg (2005) and Flyvbjerg et al. For 23 of the 27 rail projects demand forecasts were overestimated.63 0. The downside case was produced by the sponsor's forecasters on the basis of their experience from Monte Carlo simulations of risk in other projects. The standard deviation is measured for actual divided by forecast demand. Benchmarks typically establish best. Provided that an estimate was high. average. demand forecasts were overestimated. Ramp up denotes a delay in demand take-up during the first months or years of a new service. final business case. The standard deviation is measured for actual divided by forecast demand. According to the forecasters. For the present study. inertia in changing travelers' behavior. for which valid and reliable data on forecasting accuracy were available.. excluding statistical outlier Average accuracy Standard deviation 0. not best practice. Predicted demand.1% 95% confidence level: 15% passenger shortfall Likelihood of passenger shortfall of 15% or more: 5% Ramp up profile (first five Year 1: 60% of forecast years after going live) Year 2: 75% of forecast Year 3: 85% of forecast Year 4: 95% of forecast Year 5: 100% of forecast probabilities of all the different risks and uncertainties in the modeling and forecasting process. Accuracy is measured as actual divided by forecast demand for the first year of operations. This is equivalent to a standard deviation of forecasting outcomes of 9. downside case.49 0.52 0. which is equal to a 5% risk of a demand or revenue shortfall of 15% or more. average and median practice in rail demand forecasting is far from best practice. The delay may arise due to the slow spread of knowledge about the service. For 53 of the 62 rail projects in the dataset. best practice is equivalent to being on target.50 for these projects. Forecast 14. Flyvbjerg et al. Item Table 2 Accuracy in 27 rail demand forecasts. expanded study. As we will see. the benchmark is therefore established on the basis of average and median practice. respectively.e. or median practice. Table 3 shows results from the new. Without statistical outliers actual demand is on average 51. All large transportation infrastructure projects. the ramp up profile was established on the basis of a limited amount of available data from other systems and a degree of professional judgment with the forecasters.59 0.

e. taking into account the possibility that the outlier may be caused by measurement error. the overestimate was 100% on average and half the forecasted passengers never showed up on the trains. Flyvbjerg / International Journal of Project Management 31 (2013) 760–774 that is. The A-Train demand forecast is highly optimistic in this sense. the ramp up period. More often than not they make even larger errors in estimating the variance (typically measured in standard deviations) of the expected outcome. Accuracy is measured as actual divided by forecast demand for the first year of operations (source: Flyvbjerg database). The table shows that: 1. this is a common error in forecasting and it results in forecasts that are optimistic in the sense that the actual range of possible outcomes.51 0..35 0.e. Ramp up denotes the delay in demand take-up during the first months or years of a new service. Finally.e. making accurate estimates of ramp up important to good public relations and corporate reputation. This is equivalent to rail demand forecasts being overestimated by 69% on average. as mentioned above. For instance the risk is 50:50 of an overestimate of 96% or more. i. Compared with the benchmark. 62 rail projects 61 rail projects. The numbers show that the risk of overestimates in rail demand forecasts is high. Amos Tversky. The practice in business cases and cost–benefit analyses of discounting future benefits and costs to net present values makes the accuracy of ramp up even more important.. excluding statistical outlier 25% 50% 75% 0. equal to a overestimate of 96% or more. larger sample of forecasts is approximately the same as in the earlier. For half the projects in the sample actual demand is 49% lower or more than that forecast. Standard deviation 95% confidence level Likelihood of demand shortfall of 15% or more A-Train downside case Benchmark (61 forecasts) 9. Applying the outside view 9. The accuracy of ramp up is crucial to realizing forecasted revenues. Dealing with demand ramp up Step three in due diligence based on the outside view is to employ the benchmark to evaluate performance for the forecast in question. compared with 5% in the downside case. i. step 3 also includes evaluating the ramp up of patronage. because first-year revenues and benefits are attached the greatest weight in such discounting. actual uncertainty. and others has established that a major source of error in forecasts is a prevalent tendency with forecasters to underweigh or ignore variance of outcomes and thus risk. Table 6 compares estimated ramp up for the A-Train with actual ramp up in the 11 rail projects for which comparable ramp up data was available from the dataset. the A-Train forecast assumes an increase of 40 percentage points over five years. The 95% confidence level is equivalent to a demand shortfall of 85% in the benchmark. public and media scrutiny will also be at its highest during the first period of operation. As mentioned above. 3. compared with 9. again with rail and the A-Train demand forecast as examples of the general problematic.766 B. equal to an overestimate in forecasts of 186% or more in a quarter of cases. Accuracy in the new. To illustrate. This is to say that not only do forecasters err in estimating the expected outcome of the variable they are forecasting.54 0. smaller sample. The standard deviation of accuracy in the benchmark is 33%. from 60 to 100%. 8..79 0. Table 4 shows the quartiles for the expanded study with and without the statistical outlier. estimated uncertainty.36 0. The likelihood of a demand shortfall of 15% or more is 80% in the benchmark. although accuracy is still low with actual demand being 41% lower than forecast demand on average. In what follows the figures without the outlier are used. Furthermore. Getting ramp up wrong has been known to seriously jeopardize the viability of projects. is larger than the estimated range of possible outcomes. compared Table 4 Quartiles for accuracy in 62 rail demand forecasts.1% 15% shortfall 5% 33% 85% shortfall 80% Table 5 compares the A-Train downside case with the benchmark established above. compared with the benchmark. compared with 15% in the downside case. Without statistical outliers. The 60% starting point assumed for the A-Train ramp up profile in year one compares to 41% actually realized for the 11 projects for which data are available. For the ramp up profile itself. the risk is a full 16 times higher in the benchmark than in the A-Train demand forecast of a demand shortfall of 15% or more. For a demand forecast. the table shows that for 75% of rail projects actual demand is 22% lower or more than forecast. The table shows that for 25% of rail projects actual demand is 65% lower or more than forecast demand. the standard deviation of the A-Train demand forecast appears to be highly underestimated. It is the data for these 62 rail demand forecasts that are used as a benchmark against which other rail demand forecasts may be measured.1% in the A-Train downside case. i. Here we therefore emphasize how to benchmark variance in a business case forecast. As mentioned.78 . This is an overestimate for the A-Train of 46% for year one. accuracy is 10 percentage points higher in the larger sample than in the smaller one. 2. including the A-Train forecast. equal to an overestimate in demand forecasts of 28% or more for these projects. research by Daniel Kahneman. Table 5 Main results from benchmarking of A-Train downside case against outcomes of 61 actual rail demand forecasts. The difference between including and excluding the outlier is small. Again standard deviations are high indicating high risks of large errors in rail demand forecasting.

actual demand dropped over time. too.. n. each a multibillion-dollar venture. Nor were the data available upon request.e. compared with the benchmark. most likely the A-Train demand forecast is overestimated as regards ramp up. If asked to provide such evidence of actual track record. 2004).a. 2005. But when asked for evidence of track record for the accuracy of these forecasts. Beyond ramp up. For the A-Train. Year A-Train (planned) 11 rail projects (actual) 1 2 3 4 5 60 75 85 95 100 41 49 68 51 55 to 14 percentage points actually realized in the benchmark. i. i.. and neither have others (a common explanation for public projects). The data thus does not support the estimated ramp up for the A-Train. when demand shortfalls proved the project financially nonviable and a national scandal ensued leaving high-ranking politicians and officials with egg on their faces. similar.B.86. which is already quite poor with a median overestimate of 96% (see above). % Later-year demand overestimate. This was seen as indication that the data may not exist but might simply be postulated by the forecaster. The table shows that with 45% of demand having not materialized after five years of operations it hardly makes sense to even speak of ramp up for the 11 projects.e. similar forecasts they had done. Pickrell. evidence of documented track record of accuracy of past predictions is typically not available from forecasters. in effect. who was invited to invest substantially in the project and to take on a significant part of the demand and ramp-up risks. The available evidence indicate that this is common for rail demand forecasts and is a major source of bias in such forecasts. Moreover – and unfortunately for the forecaster – the dataset used here to establish the benchmark for the due diligence contains information about track record for two of the rail projects mentioned by the A-Train forecaster on their credentials list. which is why due diligence is important. that the investor was asked to commit hundreds of millions of dollars to the A-Train venture on sheer belief and trust that the demand forecast would be accurate. for the A-Train forecaster. % Mode share for rail overestimate. actual demand in the 11 projects was approximately half of the forecasts. 1990. Checking the forecaster's track record Step four in the method for due diligence followed here consists in checking the forecaster's track record from other. The party asking for evidence was a potential major investor. Either way. no evidence was provided. they listed credentials from more than 20 previous. which undermined trust in the forecast and the forecaster. Table 7 shows that the forecaster's track record for the two projects is significantly poorer than the benchmark. Actual demand in percent of forecast demand. no ex post data had been collected or such data were confidential. The reasons given were the same as above. The study found that the demand forecasts “completely Table 7 Demand overestimate in percent for two rail forecasts done by the A-Train forecaster. 2005. who would take on substantial demand risk. The national audit office in the country where Project 2 is located decided to commission an in-depth ex-post study of benefits and costs of the project. As mentioned above. But “Trust me!” has historically not been the best basis for handing over large sums of money to strangers to invest.a. These two projects. UK National Audit Office. many projects still fail to meet demand forecasts. of course. The studies even documented negative ramp up for a number of projects. performed as shown in Table 7. Table 6 shows that five years after going live. Mode share is the percentage of total travellers expected to use rail. 10. For the A-Train forecast. because they have done no systematic follow-up studies of accuracy. which is a large consultancy with global presence and extensive experience in demand forecasting. Rather. The forecaster's inability or unwillingness to provide evidence of the actual accuracy of their forecasts therefore meant. even to a potential investor. Standard and Poor's. But rarely do forecasters provide ex post data on actual accuracy of forecasts 767 made in the past. the data claimed to support the A-Train ramp up profile was not provided with the forecast. This conclusion holds both for ramp up for each of the 11 projects and for average ramp up for all 11 projects. forecasters typically reply that the evidence is confidential and cannot be released (a common explanation for private projects) or that the evidence is not available. we have a case of consistent underperformance as regards later-year demand. if first-year demand turned out substantially lower than forecasted. forecasts. See main text for detailed explanation. Each figure shows by how many percent that variable was overestimated. from 41 to 55. % Comment by National Audit Office Project 1 Project 2 500 175 250 (4th year) 150 (5th year) 350 n. the evaluation above shows that such trust would clearly be unwarranted. Based on this evidence. Four published studies on ramp up in rail and road schemes support this conclusion and thus do not support the A-Train ramp up profile (Flyvbjerg. “completely failed … grossly overestimated" . So. Flyvbjerg / International Journal of Project Management 31 (2013) 760–774 Table 6 Estimated ramp up profile for the A-Train and actual average ramp up for 11 other rail projects. Forecasters typically attempt to lend credibility to their bid to do a forecast for a specific project by listing forecasting experience from other similar projects. Project First-year demand overestimate. which amounts to an overestimate by a factor 2. should they decide to invest in the A-Train. All four studies found that error and bias in demand forecasting is not caused by forecasters not considering ramp up but by actual ramping up – if it exists at all – being far less pronounced and taking many more years than assumed by forecasters.

These risks are high and have been proved significant through statistical testing. The additional demand risks for the A-Train are: 1. 3. as done above. because although the airport link is forecasted to carry only 10–14% of a total A-Train passengers. 5.e. Quite the opposite. 2005:9). whereas higher distances from airports to the city edge and city center indicate higher rail use (Bradley. The forecaster's extremely poor track record for the few projects for which forecasting accuracy could be established. “the private consortium [bidding for the link] was presented with grossly overestimated [demand] forecasts. The point is that the forecasting business should also not be allowed to do this. The average overestimate for the four forecasts was 147%.9 times the already dismal benchmark – and 200% for the four-to-five-year estimate. This risk is mitigated. Prospective investors would be well advised to require more information about the track record of the A-Train forecaster before committing funds to this project. Flyvbjerg / International Journal of Project Management 31 (2013) 760–774 failed to capture development in the [rail passenger] market at [the location of the rail project]”. . Thus a risk may exist that high fares could result in lower-thanforecasted demand.” Thus the private consortium that funded Project 2 was misled by the demand forecast. Very few other businesses of this size would get away with not demonstrating the track record and quality of their product. Total A-Train revenues are particularly sensitive to demand risk on the airport link. Thus the risk of demand overestimate and shortfall seems higher for airport links than for other rail links. It is the task of quality control and due diligence to point to this problem and to make sure the track record is documented to the extent possible. The benchmark documents an expected demand overestimate of 69% (median 96%) and there are no a priori reasons to assume that the expected overestimate in the A-Train forecast would be lower than in the benchmark. In sum. 11. which is more than double the benchmark. which was [later] criticized [by the National Audit Office] but without response [from the forecaster]. The forecaster's unwillingness or inability to document accuracy for their previous forecasts. however. given the fact that for the two projects on the forecaster's credentials list for which we have data. because this might disclose the identity of the A-Train. 2. The study also found that. the average overestimate was 338% for the first-year estimate – i.. 4. The database used for the present study includes data on forecasting accuracy for four airport rail links. 6. In a wider perspective. Further demand risks exist that cannot be revealed. Part of the A-Train system runs a service to an airport located at the edge of a metropolitan area not far from the city's business center. or has worked in the past. by the fact that demand on airport rail links tend to be relatively inelastic to changes in fares. and there are no defensible reasons they are. Further demand risks Step five investigates whether further demand risks exist. Thus if the airport link demand forecast is overestimated then this might significantly and negatively impact revenue for the total A-Train. In sum. which are already high. given the available evidence. trust in the A-Train forecaster and forecast suffered from this combination of: 1. 2005). 2. further demand risks for the A-Train indicate that demand shortfalls for the A-Train are likely to be higher than average shortfalls in the benchmark. Research shows that this type of location indicates a higher-than-average risk for lower-than-forecasted rail use. As a result the project went bankrupt and the consortium lost a fortune. 4. the forecaster simply ignored the critique and did not bother to answer the auditor. Other things being equal. and the consortium – to their later grief – did not carry out due diligence for the project. according to the audit. When the National Audit Office criticized the forecaster for this. Urban development in the catchment area for the A-Train is dispersed and low-density. forecasters' unwillingness or inability to document the accuracy of their forecasts runs directly against much-touted policies for evidence-based decision making and management and it amounts to forecasters effectively asking their clients to buy – both in the sense of believing in and paying for – their product without evidence to substantiate that the product actually works. A number of circumstances specific to the A-Train pose such further risks. this indicates that demand shortfalls for the A-Train are likely to be higher than average shortfalls in the benchmark. the available information regarding the forecaster's track record does not support the forecaster's claim that the A-Train demand forecast would be accurate. like the one described here for the A-Train. Given the available information it is prudent to assume a very high risk of overestimate in the A-Train demand forecast and thus a very high risk of revenue shortfalls. 2007). it is forecasted to generate 35–42% of total revenues. The type of forecasting we are studying here is globally a billion-dollar business. The forecaster being discredited in public by a national audit office for having “completely failed” and not even responding to the critique when invited. To assess risk on this point would be to assess whether or not the high fares for the A-Train airport link are likely to fall within the area of inelasticity. probably because air passengers generally have a high value of time (Bradley. on top of those already described and analyzed above. Changes in density and land use that were expected but did not materialize are a common cause of failed demand forecasts (Transportation Research Board. especially if investors were asked to carry all or a substantial part of the demand risk. two of which were forecast by the A-Train forecaster. In the due diligence of the A-Train demand forecast. Predicted demand for the rail line is partly dependent on increased density around stations. for the A-Train. 3.768 B. Such assessment is pertinent but was not carried out by the forecaster. The planned fare level of the A-Train airport link seems high when compared to fare levels at other airport rail links.

.62 0. clearly the data in the table do not support the A-Train forecaster's claims regarding higher forecasting accuracy for privately funded schemes. On this background. Expected outcome With 90% confidence With 80% confidence With 50% confidence Actual/forecast demand First-year passengers. The majority of transportation infrastructure schemes – including the A-Train – has unique characteristics. It was concluded that either (a) the A-Train forecaster did not know the accuracy of Table 9 Accuracy of demand forecasts for privately funded rail projects. Private ventures were found to be incentivized to inflate demand forecasts to make projects look good on paper in order to secure investor interest.9–11.1 million predicted. in the interval from 23% to 101% of forecast. When the A-Train forecasters were given the opportunity to comment on the methodology and results presented above they made the following two claims: 1. with 80% confidence.15–1. the second in the next. just as the forecaster presented no evidence to support the validity of the A-Train forecast itself.1–15. Thus the A-Train forecaster's forecasts were the most inaccurate of all in the sample. actual demand would lie in the interval from 15% to 110% of forecast.01 0.59 . Table 9 shows the ratio of actual to forecast demand for privately funded rail projects in the database. The ratio of actual to forecast demand is 0. Not only were these forecasts more inaccurate than public-sector forecasts. i. and with 50% confidence in the interval from 35% to 78% of forecast (see Table 8).5 3. mio 0.2 4. resulting in large overcapacity and revenue shortfalls. which found that demand forecasts for privately funded roads were significantly more inaccurate (overestimated) than demand forecasts for public roads. Table 8 Expected outcome and confidence intervals for A-Train demand. 13. and especially for private-sector projects. Project type Actual/forecast demand 5 private projects 56 public projects All projects (61) 0.10 0. Expected actual demand would then be 59% of forecast demand. and for which first-year demand was overestimated by 175 and 500%.e. Two of the five privately funded projects in Table 9 are the two projects mentioned above under track record.30 for privately funded schemes and 0. This conclusion is supported by a large-sample study of toll roads carried out by Standard and Poor's (2004). Demand shortfalls are thus likely to be larger than those shown in Table 8. because it is a forecast for a privately funded project. Given the optimism documented above in the A-Train demand forecast regarding variance. The first claim is covered in this section. The A-Train demand forecast is therefore believed to be more accurate than the forecasts in the benchmark.3 million first-year passengers instead of the 14. Thus 5.78 8.23–1.2–14.. The large overestimates in the track record of the forecaster and the specific demand risks for the A-Train mentioned above also point in the direction of substantial risk of overestimation.30 0. they were also more inaccurate on average than the other private-sector forecasts presented in Table 9. built from the mid 1990's.3 2. such as the A-Train.62 for public schemes. for instance comparing the A-Train project to the rail projects in the benchmark. Given the evidence presented above. for which the A-Train forecaster had themselves done the forecast.0 769 2. and private funding is likely to result in more accurate forecasts. Again we therefore have to look elsewhere for evidence.B. on average 30% of demand materialized for private projects versus 62% for public ones. most likely the A-Train demand forecast is less accurate than the average rail demand forecast. the forecaster's claim is undermined that the A-Train demand forecast is likely to be more accurate than the forecasts in the benchmark.8 million forecasted passengers would not show up on the trains. then one would expect an overestimate of 69% as shown above for the benchmark. etc. However.35–0. provided the A-Train forecast is neither more nor less accurate than demand forecasts in the benchmark. In fact.59 0. respectively. If the A-Train demand forecast is argued to be neither more or less accurate than the average rail demand forecast. Thus inaccuracy (bias) is more than twice as high for private schemes than for public ones. for both claims it may be observed that the A-Train forecaster presented no evidence to support the claims. as done above. Although the number of private projects for which data are available is small. Establishing expected outcome Step six establishes the expected outcome of the forecast. Do private projects perform better than public ones? Step seven solicits comments from the forecaster regarding the previous six steps of the due diligence. Flyvbjerg / International Journal of Project Management 31 (2013) 760–774 12. With 90% confidence. or 8. the data supports the opposite conclusion. have come to the market. Therefore it is wrong to compare them to other projects. first-year demand. it appears prudent to point out that if the estimate of expected demand is as optimistic as the estimates of variance and ramp up then expected demand is overestimated. Private funding is likely to curb bias in forecasting and result in more accurate forecasts. namely that demand forecasts for privately funded projects are more overestimated than for publicly funded ones. ramp up. The accuracy of demand forecasting for bidding consortia and financial institutions has improved since the mid 1990's as more privately funded schemes. according to the A-Train forecaster.

show a high degree of overestimate. 5 It is correct that infrastructure projects typically have physical. the answer to this question is – based on the evidence presented above – that the forecast is likely to be overestimated. which. The mode share for the A-Train airport link appears to be overestimated. per definition. which is already high.” mentioned by the UK Treasury. Issues of density. Are projects unique? The second claim made by the A-Train forecasters under step seven of the due diligence was that projects are unique and therefore cannot be compared. Managers who see their projects as unique believe they have little to learn from other projects. urban form. The forecaster provides no track record to document accuracy in their previous forecasts. etc. 7. locational. Nevertheless. are data like those presented above in the benchmark. however. Evidence from previous forecasts done by the forecaster. for privately funded schemes for which data are available. bus. Assumptions about ramp up in the A-Train forecast is unsupported by evidence and appears to be overestimated by approximately a factor 3. such assessment is crucial.or underestimated. taken from the world's largest database of such forecasts. 2. eroded trust in the forecaster and their forecast. Either way. In fact. that despite physical or other uniqueness rail and other infrastructure schemes are statistically similar in the sense that they are highly likely to have large demand shortfalls and large cost overruns (Flyvbjerg. may prove ruinous. For the A-Train forecast such evidence does not exist. The central arguments for a likely overestimate are: 1. Flyvbjerg / International Journal of Project Management 31 (2013) 760–774 their own forecasts. 6. as explained above. The Danish and 5 Recent research on major ICT projects shows that one of the most reliable predictors of larger-than-normal cost overrun is project management seeing their project as unique (Budzier and Flyvbjerg. Final step of due diligence: are forecasted benefits likely to happen? The eighth. the claim is wrong. benefits. is not supported by evidence. 2011. demand impacts the environment and thus the results of environmental impact assessments. This is a claim often made by forecasters and project managers. 2006). significantly higher than in the benchmark. demand overestimates are more than twice as high as in other schemes. 15. Swiss Association of Road and Transportation Experts. or (b) they knew and misinformed about it. 3. at least in a statistical sense. with a very high level of statistical significance. which directly impact viability for a given project. The use of such data has been made mandatory in the UK by the UK Treasury and the UK Department for Transport (2006) to adjust for optimism bias in UK transportation cost forecasts following the methodology described in Flyvbjerg (2006). the forecaster's claim was rejected that because the A-Train involves private funding the A-Train demand forecast is likely to be more accurate than the forecasts in the benchmark. tendency for project appraisers to be overly optimistic. especially in analyzing and managing risk. Demand also impacts costs because demand determines the size of facilities and systems. 14. when they observe about project appraisal: “There is a demonstrated. 4. For instance. 2008. and statistical prediction based on the outside view is an effective means to improve accuracy in forecasts as demonstrated by Flyvbjerg (2006). or other characteristics that are unique. Finally. including to benchmarks. 5. the percentage of total travellers expected to use rail. as shown above. will be more accurate than in publicly funded ones. The “data from past projects and similar projects elsewhere. and by how much. because demand impacts revenues. This. step in a due diligence of a cost or benefit forecast is to answer the question of whether the specific forecast is likely to be over. Average practice in a benchmark of 61 comparable passenger demand forecasts. in turn. They therefore accumulate less knowledge and experience to inform their decisions. 2007b). This is easy to understand. such as the A-Train. one cannot argue that the A-Train demand forecast is likely to be less overestimated than the average rail . contradicted by the data. Flyvbjerg and Budzier. For the above reasons. 2007a. and policy pose risks to demand that are larger for the A-Train than for the average project in the benchmark. In demand forecasting. is an overestimate of demand of 69% (median 96%). and duration … it is recommended that these adjustments be based on data from past projects or similar projects elsewhere. The forecaster's argument that demand forecasts in privately funded schemes. the risk of a demand shortfall of 15% or more is 16 times higher in the empirical benchmark than in the A-Train forecast. The claim is incorrect. that is. Swiss governments have implemented similar measures to curb unrealistic forecasts (Danish Ministry for Transport. 2011). requires knowledge of variation across projects and thus a view of projects as non-unique. empirically based adjustments to the estimates of a project's costs. To redress this tendency appraisers should make explicit. for which data on accuracy could be found.770 B. unless there is evidence that the forecaster is likely to have been more accurate than the forecasters who did the forecasts in the benchmark. systematic. Statistical similarity is all that is needed for statistical prediction. This is the expected overestimate of a demand forecast of this kind. fare levels. and final. This is the approach taken by the UK Treasury (2003:1). For the A-Train demand forecast. but quite the opposite. On balance. in the sense that research shows. these unfounded claims. Variance of the expected outcome is significantly underestimated in the A-Train demand forecast. location.” “Similar” here means statistically similar and although the type of adjustments recommended by the UK Treasury were neglected by the A-Train forecaster such adjustments appear to be exactly what would be needed to produce a more reliable demand forecast for the A-Train. against the percentage expected to use car.

i. 8. where forecasters foreseeably produce deceptive forecasts. 6 2. The risk is very real that the A-Train faces a similar fate. if one gives the benefit of doubt to the A-Train demand forecast and assumes that it is neither more nor less accurate than the average rail demand forecast. firing the forecaster may be letting off forecasters too easily.1 million passengers. Second. In fact. The national auditor called the forecast “completely failed” and “grossly overestimated” and documented how the forecast had misled investors to commit billions of dollars to a project that proved non-viable.” which was later proven optimistic by actual data. i.B. to document accuracy of their previous forecasts. Fire the forecaster? Two observations may be made about the A-Train demand forecast. In addition to the forecaster's numbers being a cause of concern. if the promoter who commissioned and paid for the original A-Train demand forecast requested a valid and reliable forecast. Had their forecasts for a multibillion-dollar high-speed rail project. and others who use the forecast. and as mismanaged as risks in the financial markets. including for UK government-funded projects. they are being misinformed. 771 1. the promoter may also consider to later seek compensation from the forecaster for possible damages caused by the faulty forecast. too. Flyvbjerg / International Journal of Project Management 31 (2013) 760–774 demand forecast in the benchmark. that the A-Train demand forecast is more overestimated than the benchmark. if the promoter and forecaster conspired to knowingly produce an inflated forecast in order to lure investors to fund the A-Train project by making it look good on paper. This is prudent advice. The investor decided not to invest in the A-Train. criminal penalties may be in place. thoroughly debunked by a national audit office and did not respond to the critique when invited to do so. against the traffic and revenue forecaster for the Clem 16. Thus 5. to provide documentation for their assumptions regarding ramp up and instead justified these by “professional judgment. then the promoter should ask to have their money back on the grounds that the forecaster has delivered a faulty product. which exposed financial forecasters' dubious practices. investors. when evidence shows that such comparisons are justified and are mandatory elsewhere. However. became a national scandal. First.. given the evidence presented above. upon request. no forecaster has been sued for an inaccurate forecast. for the losses they incur. given the available evidence. when. which has an average overestimate of 69% (median 96%). which was similar to the A-Train. 4. Argued without evidence that because the A-Train is privately funded its demand forecast is more likely to be accurate. but the forecast is unlikely to be a statistical outlier. because it gives the client. of the type garbage-in-garbage-out. but the A-Train demand forecast hides this for the time being by its optimism. also for major project investment decisions. the forecast can be argued to be worse than garbage. and which went bankrupt.3 million passengers during the first year of services. economists began to discuss the necessity of “firing the forecaster” (Akerlof and Shiller. like thousands of such forecasts made every year at substantial cost to clients.e. if the damage caused by forecasters is severe enough. On this basis it was concluded that potential investors in the A-Train – public or private – would be well advised to trust neither the forecaster nor the forecast and to not take on demand risks until demand and revenues had been reassessed in the manner described above. The latter was the point made by the national audit study mentioned above about another forecast done by the A-Train forecaster for another multibillion-dollar high-speed rail project. The opposite is more likely. most likely both the overestimate and the shortfall will be larger than these figures. as described and assessed above: 6 Most likely. risks for major project investments like the A-Train are at least as large. Was unwilling or unable. that is. Instead of reducing risk in decision making. Was unwilling or unable. as misunderstood. In finance. 2009:146). 3. to the best knowledge of the present author. In a few cases. But here. In general. when evidence indicates that the exact opposite is the case. state-of-the-art demand forecast. and had to go through painful financial restructuring. . including for the forecasters own previous forecasts. So far. A 50% chance that actual demand will fall in the interval of 35% to 78% of the forecast. In this case. biased forecasts and bad risk assessments led to the 2007–2009 market collapse. Argued without evidence that the A-Train is unique and may therefore not be compared to other projects. the forecaster's behavior also undermined trust when the forecaster: 1. as explained above.0 million passengers For the A-Train. This is a normal. This may well be changing with an AUD$150 million class action suit under way in Australia.e. 4. 5. forecasts like this increase risk by systematically misleading decision makers and investors about the real risks involved. 2. in fact. then investors may consider seeking compensation for damages caused by the conspiracy.8 million of the forecasted passengers would most likely never show up on the train service 2. documented above. equivalent to actual demand being 59% of that forecasted. and probably more so because data about project risks are less available than are data about market risks. This advice was followed by the investor who commissioned the due diligence presented here. An overestimate of 69%. upon request. instead of the forecaster's estimate of 14.. As a consequence. the forecast will prove to be less accurate than the benchmark.9–11. then one would predict the following: 1. The forecast is garbage. the impression that they are being informed about future demand. Some forecasts are so grossly misrepresented and have such dire consequences that we need to consider not only firing the forecasters but suing them.

UK Department for Transport. Finally. the incentive structures designed by Flyvbjerg et al. Professional organizations like PMI. optimism is non-deliberate. social. through blatant negligence or deliberate deception. they would need to unlearn conventional forecasting methods and to instead learn about optimism bias. be they government. Being academic. Malpractice in project management should be taken as seriously as malpractice in other professions. presented above. and thus quietly accepting them. they are practicing strategic misrepresentation and are thus lying. which has been officially endorsed by the American Planning Association (2005) and made mandatory by government in the UK. Here the Sarbanes–Oxley Act-like legislation. Forecasting fools should be sent back to school. government and business are beginning to see this. economic. Gardener and Moffat. 7 This research has demonstrated that fools and liars constitute the majority of forecasters and that forecasts are used as sinister tools of fraud more often than we would like to think. an even heavier stick would be to prosecute forecasters who. for instance to obtain approval and funding for their projects. of course. APA. However. RTPI. and Switzerland (Danish Ministry for Transport. and other professional societies for managers. Their key teachers should be people like Daniel Kahneman. Swiss Association of Road and Transportation Experts. 2006). are not what I would call ethical. This needs to be debated openly within the relevant professional organizations. 1994. describing Taleb's fools as people who are subject to “optimism bias” and the “planning fallacy” and liars as those practicing “strategic misrepresentation. 2008. 2006. 1986:28) found “nearly universal abuse” of forecasting in this manner. and there is no evidence that things have improved since Wachs did his pioneering studies (Flyvbjerg. needless to say. something that is rarely done today. strategic misrepresentation. members who do unethical forecasts. recent research has also developed the concepts. Forecasts are used to “cloak advocacy in the guise of scientific or technical rationality. et al. and Martin Wachs. 2008. 2007a). depending on how serious their fraud is. which is incompetent at best (made by fools) and fraudulent at worst (made by liars). given the large financial. 2012). but which would undoubtedly improve accuracy. and thus innocent. However. like medicine and law. This is why carrots will be ineffective with frauds and sticks must unfortunately be brought out.” and the “conspiracy of optimism” (Flyvbjerg et al. reference class forecasting. What they do is no different from repeating lies simply because ‘it's my job. Wachs (1990:146.’ knowing pretty well that their forecast is ineffectual. Finally. 2007). (2002) and Flyvbjerg (2007a) are 7 A gray area exists between deliberate misrepresentation and innocent optimism. When in school. there is little excuse for accepting forecasts like that for the A-Train. despite codes of conduct that explicitly state that misinforming clients. Such behavior has been called the "conspiracy of optimism" (Gardener and Moffat. Nassim Taleb. planners. principal–agent problems. quality control. A light stick may be found in professional ethics. that their forecasts are likely to be optimistic. By not sanctioning fraudulent forecasts. it is interesting to note that such penalties seem to be non-existent or very rare. professional organizations become co-responsible for their existence. APM. the theories use more polite and opaque language. Flyvbjerg. and accountability. Per definition. because they assume. and others is unacceptable behavior by members of these organizations. incentives. or citizens.’ Anyone who causes harm by forecasting should be treated as either a fool or a liar. Forecasters may know. due diligence. Some forecasters cause more damage to society than criminals. 1994. Forecasting frauds knowingly bias their forecasts for personal or organizational gain. citizens.772 B. The suit is organized on behalf of 700 investors who lost their money when the toll road went bankrupt (Samuel. or have a hunch. 477) classic formulation. government.. Taleb (2010:163) says about deceptive forecasters: “People … who forecast simply because ‘that's my job. The main takeaway for students would be a realization that a fool with a tool is still a fool. Hirt. The suit is historic as the first of its kind and should therefore be studied carefully by forecasters and forecasting scholars alike. Luckily. People who deliberately decide or conspire to be optimistic. 2008.” “agency. and environmental risks that are at stake in this type of multibillion-dollar investments. and it is common in all sectors of the economy where forecasting routinely plays an important role in policy debates.. once the errors are pointed out to them and better ways of forecasting are presented. But this term is an oxymoron. tools. often for good reason. therefore.” in Wachs' (1989. they may decide not to investigate further and not to correct for possible optimism. Wilson. Weston et al. A heavier stick would be to make forecasters financially liable for inaccurate forecasts and to reward them for accurate ones.” Management research has recently developed strong theory to help identify the “fools” and “liars” Taleb talks about here. corporations. and that. So was reference class forecasting (Flyvbjerg. Denmark. and possibly exclude. unintentional. 2006. they must stop being fools. that optimistic forecasts are more likely to get projects approved than realistic ones. Forecasting frauds are therefore not immediately motivated to change their ways. cause serious damage to others with their forecasts. are not optimistic. They make errors unknowingly and are therefore likely to be motivated to do things differently. Hirt. 2005). political power. Given the knowledge and tools we have today for making better forecasts. the outside view. We have the knowledge and tools to disclose the incompetence and fraud and should clearly do so. the planning fallacy. according to Wachs.. which has recently been implemented in . Weston et al. If there are no incentives to get forecasts right. means to curb both optimism bias and strategic misrepresentation in forecasting. The outside view and due diligence.. and economists could use their codes of ethics to penalize. Fraud is their business model. black swans. 2007). Flyvbjerg / International Journal of Project Management 31 (2013) 760–774 Jones toll road in Brisbane for producing “woefully inaccurate” forecasts. 2011. perhaps we should not be surprised when they are wrong. and incentives that may help curb delusional and deceptive forecasts. the inside view. 2009. was developed with this purpose in mind. Given how widespread unethical forecasts are. Forecasting frauds should be fired and possibly prosecuted. To not take malpractice seriously amounts to not taking the profession of project management seriously. engineers.

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N. and social and environmental impact assessments that typically support decisions on projects – are often significantly different from actual ex post costs and benefits. Journal of Personality and Social Psychology 67. 2006. London. The paper offers (1) a new methodology for quality control of front-end estimates. 2007. Historical Cost Growth of Completed Weapon System Programs. Dantata. akin to the case study presented above. Bainbridge.C. Flyvbjerg.org/newsreleases/2005/ftp040705. Murray. with the specific purpose of measuring whether estimates become more accurate and actual outcomes improve with the application of the methodology.A.. Flyvbjerg. Managing Project Uncertainty: from Variation to Chaos. Case studies with additional examples of how the proposed (or similar) methodology for quality control works in practice. Rheden. Lock-in and its influence on the project performance of large-scale transportation infrastructure projects: investigating the way in which lock-in can emerge and affect cost overruns. signifies progress (United States Congress. . with a view to obtaining more in-depth knowledge and a wider variety of experience regarding the strengths and weaknesses of the methodology and the theories behind it. Younossi. 2007b. CA. Environment and Planning B: Planning and Design 37. 2009.. O. MA. Flyvbjerg. something that is rarely done today in research on project performance. CA. Fischoff. 17.).S.. New York. Flyvbjerg / International Journal of Project Management 31 (2013) 760–774 many countries around the world. and Why It Matters for Global Capitalism. 5–15 (August). A. 2009. Danish Ministry for Transport. Transportation Research A 39 (6). G. 3. The Netherlands (July. 2012. Due Diligence: Planning. 773 References Akerlof. B. B. 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