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

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

Human judgment. But for most projects. planners' preference for the inside view over the outside view is unfortunate. biases in decision making are persistent and de-biasing will not happen of its own accord. 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. two types of explanation best account for forecasting inaccuracy: optimism bias and strategic misrepresentation. the outside view is much more likely to produce a realistic estimate. This is the conventional and intuitive approach. On average. Human bias is bypassed. Undoubtedly. We therefore need to distinguish between these two types . as shown by the simple experiments conducted by Kahneman and others. The comparative advantage of the outside view will be most pronounced for non-routine projects. according to Kahneman and Tversky. The research shows that when people are asked simple questions requiring them to take an outside view. 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. For this reason. Finally the work demonstrates that errors remain compelling even when one is fully aware of their nature. That is because the outside view bypasses cognitive and political biases such as optimism bias and strategic misrepresentation and cuts directly to outcomes (Flyvbjerg. The traditional way to think about a complex project is to focus on the project itself and its details. and social and environmental impact assessments for planned ventures. 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. however. Gilovich et al. For example. 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. 1994. but it is significantly more realistic than the forecast made by the first group (Lovallo and Kahneman. However. 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. Potentials and barriers for the outside view As argued in Flyvbjerg (2007a). In contrast. choosing the right class of comparative past projects would become more difficult when planners are forecasting initiatives for which precedents are not easily found. for instance the introduction of new and unfamiliar technologies. the outside view. That is still overconfident. including strategic bias. be particularly likely to benefit from the outside view. 3. but it may help mitigate any type of bias. most individuals and organizations – including project managers. 2002). paying special attention to its unique or unusual features. is biased. However. The forecasts were biased by overconfidence. Due diligence is a method for systematically and reliably assessing how large biases are and for de-biasing business cases and other forecasts. 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. it is demonstrated how project managers and decision makers may use the outside view to perform due diligence of business cases. including in developing business cases and forecasts for projects.762 B. and risk departments – are inclined to adopt the inside view in planning new projects. because the outside view bypasses such bias by cutting directly to empirical outcomes and building conclusions about future events on these. which both groups of subjects were aware of. most projects. trying to predict the events that will influence its future. incentives and methods for quality control of projects and decisions must be in place. or gauge their own and others' levels of ability and control. cost engineers. are both non-routine locally and use well-known technologies that have been tried out elsewhere. While understandable. a group of students enrolling at a college were asked to rate their future academic performance relative to their peers in their major. 2007a). Such projects would. Thus awareness of a perceptual or cognitive illusion does not by itself produce a more accurate perception of reality.. The thought of going out and gathering simple statistics about related projects seldom enters a planner's mind. cost–benefit analyses. according to Kahneman and Tversky. Here it is argued that due diligence is a method for such critical evaluation. a focus on inside details will lead to inaccuracy and poor decisions. Awareness may. those that lie outside all historical precedents. Even so.” say Kahneman and Tversky (1979b:316). reduced the second group's average expected performance ratings by 20%. The outside view was originally developed to mitigate optimism bias. Due diligence as described below is a method for consistently taking an outside view on planned actions. so they cannot get all these things wrong. according to Kahneman and Tversky (1979b:314). Flyvbjerg / International Journal of Project Management 31 (2013) 760–774 and laypeople alike. being based on historical precedent. 2007a). may fail to predict extreme outcomes. “The analysts should therefore make every effort to frame the forecasting problem so as to facilitate utilizing all the distributional information that is available. which is logically impossible. In the outside view project planners and forecasters are not required to make scenarios. To be sure. It is in the planning of such new efforts that the biases toward optimism and strategic misrepresentation are likely to be largest. The contrast between inside and outside views has been confirmed by systematic research (Buehler et al. 2003:61). these students expected to perform better than 84% of their peers. that is. to bring to bear what one knows about it. imagine events. For de-biasing to take place. When both forecasting methods are applied with equal skill. see Flyvbjerg. who use the term “planner” to denote any individual or organization contemplating future actions.. 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. therefore. Below. and especially major ones. the outside view will produce more accurate results. their forecasts become significantly more accurate. like those described below. This simple diversion into relevant outside-view information.

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

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

which is equal to a 5% risk of a demand or revenue shortfall of 15% or more. Without statistical outliers actual demand is on average 51.. The standard deviation is measured for actual divided by forecast demand. Table 3 Accuracy in 62 rail demand forecasts. excluding statistical outlier Average accuracy Standard deviation 0. Best or average practice as benchmark? Step two of due diligence is establishing a benchmark against which individual forecasts may be measured.7 million passengers. For 23 of the 27 rail projects demand forecasts were overestimated. 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. downside case.49 0. according to the forecasters. to produce a forecast with zero or little error.41 0. expanded study. average. For instance. As an estimate of variance of the expected outcome.B.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. demand forecasts were overestimated. and the like. All large transportation infrastructure projects. As we will see. the average accuracy of the demand estimate was 0.61 0. In cost and benefit forecasting. final business case.. Forecast 14. In what follows.. have been included in the set. including the A-Train forecast presented above. initial operational hiccups. best practice is equivalent to being on target. from zero error. average and median practice in rail demand forecasting is far from best practice. after 10 years Downside case (variance. Measured by sample size. See main text for discussion. Benchmarks typically establish best. Accuracy is measured as actual divided by forecast demand for the first year of operations. The study is based on a sample of 210 transportation infrastructure projects of which 27 are rail projects. with and without 2 statistical outliers. (2005). i.63 0. According to the forecasters. For a detailed description of the data. the sponsors of the A-Train estimated a five-year ramp up profile for demand. 62 rail projects 61 rail projects. see Flyvbjerg (2005) and Flyvbjerg et al. For 53 of the 62 rail projects in the dataset.1 million passengers. 7. For the present study. not best practice.50 for these projects. Predicted demand. for which valid and reliable data on forecasting accuracy were available. i. excluding statistical outliers Average accuracy Standard deviation 0. namely how far the forecast in question is from the ideal. This is because benchmarking against best practice would give us only one piece of 765 27 rail projects 25 rail projects. meaning a forecast that is neither too high nor too low. in forecasting it is not a useful benchmark for due diligence. 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. 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. The data claimed to support the ramp up profile was not provided with the forecast. the benchmark is therefore established on the basis of average and median practice. The delay may arise due to the slow spread of knowledge about the service. Finally. The sponsors stated they had 95% confidence that these figures would be exceeded. the sponsors presented what they called a “downside case” for demand and revenues. Flyvbjerg / International Journal of Project Management 31 (2013) 760–774 Table 1 Sponsors' demand forecast for the A-Train. respectively. Just as important. 2005). Table 2 shows the main results from the study as regards rail. beginning with 60% of the forecast in Year 1 increasing to 100% in Year 5. Flyvbjerg et al. Although best practice is clearly an ideal to be strived for.e. standard deviations are high indicating a high risk of large forecasting errors. as shown in Table 1. This is perhaps the most consequential step of the due diligence exercise. 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. (Source: Flyvbjerg et al.59 0. risk) Standard deviation: 9. This is equivalent to a standard deviation of forecasting outcomes of 9. (2005) contains the most comprehensive study that has been published so far of accuracy in travel demand forecasting. (Source: Flyvbjerg database).33 .e.4% lower than forecasted demand. The dataset is the largest of its kind. inertia in changing travelers' behavior. Provided that an estimate was high. Table 3 shows results from the new. Accuracy is measured as actual divided by forecast demand for the first year of operations.52 0. The standard deviation is measured for actual divided by forecast demand. and ramp up profile are shown as estimated by the sponsors' forecaster. Item Table 2 Accuracy in 27 rail demand forecasts.28 information. the 2005 sample was expanded to cover 475 transportation infrastructure projects of which 62 are rail projects that are comparable to the A-Train. 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 equivalent to rail demand forecasts being overestimated by 106% on average.1%. in the sense they were built using technologies and under regulatory regimes that are comparable to those that apply to the A-Train. or median practice. with 15% lower demand and revenues than the main forecast. Ramp up denotes a delay in demand take-up during the first months or years of a new service. first year Predicted demand (expected outcome) 17.

research by Daniel Kahneman. For instance the risk is 50:50 of an overestimate of 96% or more. Applying the outside view 9. 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. More often than not they make even larger errors in estimating the variance (typically measured in standard deviations) of the expected outcome. the ramp up period. 62 rail projects 61 rail projects. The A-Train demand forecast is highly optimistic in this sense. compared with 5% in the downside case..35 0. compared with the benchmark. excluding statistical outlier 25% 50% 75% 0.. Accuracy is measured as actual divided by forecast demand for the first year of operations (source: Flyvbjerg database). The 95% confidence level is equivalent to a demand shortfall of 85% in the benchmark. Accuracy in the new. 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. i.e. Standard deviation 95% confidence level Likelihood of demand shortfall of 15% or more A-Train downside case Benchmark (61 forecasts) 9.51 0.1% in the A-Train downside case. the A-Train forecast assumes an increase of 40 percentage points over five years. estimated uncertainty. Finally. equal to an overestimate in forecasts of 186% or more in a quarter of cases. as mentioned above. public and media scrutiny will also be at its highest during the first period of operation. Getting ramp up wrong has been known to seriously jeopardize the viability of projects. Flyvbjerg / International Journal of Project Management 31 (2013) 760–774 that is. The standard deviation of accuracy in the benchmark is 33%.1% 15% shortfall 5% 33% 85% shortfall 80% Table 5 compares the A-Train downside case with the benchmark established above. The likelihood of a demand shortfall of 15% or more is 80% in the benchmark. smaller sample. Furthermore. The difference between including and excluding the outlier is small. The table shows that: 1. again with rail and the A-Train demand forecast as examples of the general problematic. the overestimate was 100% on average and half the forecasted passengers never showed up on the trains. compared with 15% in the downside case. Amos Tversky.36 0. To illustrate. because first-year revenues and benefits are attached the greatest weight in such discounting. 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. 2. 8. although accuracy is still low with actual demand being 41% lower than forecast demand on average. Table 4 shows the quartiles for the expanded study with and without the statistical outlier. equal to an overestimate in demand forecasts of 28% or more for these projects. including the A-Train forecast. actual uncertainty. Ramp up denotes the delay in demand take-up during the first months or years of a new service. Table 5 Main results from benchmarking of A-Train downside case against outcomes of 61 actual rail demand forecasts. The numbers show that the risk of overestimates in rail demand forecasts is high. Without statistical outliers. equal to a overestimate of 96% or more.79 0. i. 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. Again standard deviations are high indicating high risks of large errors in rail demand forecasting. compared with 9. the table shows that for 75% of rail projects actual demand is 22% lower or more than forecast.e. accuracy is 10 percentage points higher in the larger sample than in the smaller one.. i. step 3 also includes evaluating the ramp up of patronage. In what follows the figures without the outlier are used. 3. As mentioned. 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. As mentioned above. This is an overestimate for the A-Train of 46% for year one. For the ramp up profile itself. taking into account the possibility that the outlier may be caused by measurement error. 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. The table shows that for 25% of rail projects actual demand is 65% lower or more than forecast demand. is larger than the estimated range of possible outcomes. compared Table 4 Quartiles for accuracy in 62 rail demand forecasts. larger sample of forecasts is approximately the same as in the earlier. the standard deviation of the A-Train demand forecast appears to be highly underestimated. For a demand forecast. Compared with the benchmark.e.766 B. This is equivalent to rail demand forecasts being overestimated by 69% on average. from 60 to 100%. making accurate estimates of ramp up important to good public relations and corporate reputation. This is to say that not only do forecasters err in estimating the expected outcome of the variable they are forecasting. Here we therefore emphasize how to benchmark variance in a business case forecast. The accuracy of ramp up is crucial to realizing forecasted revenues.78 . 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. 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.54 0. For half the projects in the sample actual demand is 49% lower or more than that forecast.

. 2004). The studies even documented negative ramp up for a number of projects. But rarely do forecasters provide ex post data on actual accuracy of forecasts 767 made in the past. they listed credentials from more than 20 previous. actual demand dropped over time. 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. These two projects. 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. The available evidence indicate that this is common for rail demand forecasts and is a major source of bias in such forecasts. 2005. when demand shortfalls proved the project financially nonviable and a national scandal ensued leaving high-ranking politicians and officials with egg on their faces. This conclusion holds both for ramp up for each of the 11 projects and for average ramp up for all 11 projects. 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. The forecaster's inability or unwillingness to provide evidence of the actual accuracy of their forecasts therefore meant. Nor were the data available upon request. from 41 to 55. Project First-year demand overestimate. Rather. most likely the A-Train demand forecast is overestimated as regards ramp up. Actual demand in percent of forecast demand. % Mode share for rail overestimate. who would take on substantial demand risk. if first-year demand turned out substantially lower than forecasted. similar forecasts they had done. which amounts to an overestimate by a factor 2. % Later-year demand overestimate. % Comment by National Audit Office Project 1 Project 2 500 175 250 (4th year) 150 (5th year) 350 n. The data thus does not support the estimated ramp up for the A-Train. As mentioned above. Table 7 shows that the forecaster's track record for the two projects is significantly poorer than the benchmark. 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. “completely failed … grossly overestimated" . Beyond ramp up. Mode share is the percentage of total travellers expected to use rail. similar. For the A-Train forecast. For the A-Train. 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. 2005. and neither have others (a common explanation for public projects). UK National Audit Office. no ex post data had been collected or such data were confidential. 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.e. Either way. performed as shown in Table 7. So. for the A-Train forecaster. This was seen as indication that the data may not exist but might simply be postulated by the forecaster. should they decide to invest in the A-Train. But “Trust me!” has historically not been the best basis for handing over large sums of money to strangers to invest. which is a large consultancy with global presence and extensive experience in demand forecasting. actual demand in the 11 projects was approximately half of the forecasts. in effect. But when asked for evidence of track record for the accuracy of these forecasts. If asked to provide such evidence of actual track record. i. i. the data claimed to support the A-Train ramp up profile was not provided with the forecast. which undermined trust in the forecast and the forecaster. 10. which is already quite poor with a median overestimate of 96% (see above). Pickrell. evidence of documented track record of accuracy of past predictions is typically not available from forecasters. forecasts. 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. 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. The study found that the demand forecasts “completely Table 7 Demand overestimate in percent for two rail forecasts done by the A-Train forecaster. even to a potential investor. each a multibillion-dollar venture. Each figure shows by how many percent that variable was overestimated.a. no evidence was provided. many projects still fail to meet demand forecasts. Table 6 shows that five years after going live. See main text for detailed explanation.B. too. we have a case of consistent underperformance as regards later-year demand. 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. the evaluation above shows that such trust would clearly be unwarranted. 1990. 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. because they have done no systematic follow-up studies of accuracy.86. n. compared with the benchmark. Based on this evidence.e. The party asking for evidence was a potential major investor. of course.a. Standard and Poor's. who was invited to invest substantially in the project and to take on a significant part of the demand and ramp-up risks.. 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. which is why due diligence is important. The reasons given were the same as above.

Quite the opposite. especially if investors were asked to carry all or a substantial part of the demand risk. 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. The type of forecasting we are studying here is globally a billion-dollar business. trust in the A-Train forecaster and forecast suffered from this combination of: 1. however. this indicates that demand shortfalls for the A-Train are likely to be higher than average shortfalls in the benchmark. according to the audit. Urban development in the catchment area for the A-Train is dispersed and low-density. Thus the risk of demand overestimate and shortfall seems higher for airport links than for other rail links. because this might disclose the identity of the A-Train. Total A-Train revenues are particularly sensitive to demand risk on the airport link. The planned fare level of the A-Train airport link seems high when compared to fare levels at other airport rail links.9 times the already dismal benchmark – and 200% for the four-to-five-year estimate. because although the airport link is forecasted to carry only 10–14% of a total A-Train passengers. Such assessment is pertinent but was not carried out by the forecaster. 4. The point is that the forecasting business should also not be allowed to do this. When the National Audit Office criticized the forecaster for this.” Thus the private consortium that funded Project 2 was misled by the demand forecast. Further demand risks exist that cannot be revealed. which are already high. 5. 6. Research shows that this type of location indicates a higher-than-average risk for lower-than-forecasted rail use. 2007). 2005). 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. it is forecasted to generate 35–42% of total revenues. 2005:9). 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.768 B. 3. Further demand risks Step five investigates whether further demand risks exist. 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. for the A-Train. given the fact that for the two projects on the forecaster's credentials list for which we have data. and the consortium – to their later grief – did not carry out due diligence for the project. 11. 2. 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 database used for the present study includes data on forecasting accuracy for four airport rail links. 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. In a wider perspective. 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. Thus if the airport link demand forecast is overestimated then this might significantly and negatively impact revenue for the total 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. A number of circumstances specific to the A-Train pose such further risks. which was [later] criticized [by the National Audit Office] but without response [from the forecaster]. In the due diligence of the A-Train demand forecast. “the private consortium [bidding for the link] was presented with grossly overestimated [demand] forecasts. 2. The additional demand risks for the A-Train are: 1. The average overestimate for the four forecasts was 147%. as done above. 4. on top of those already described and analyzed above. As a result the project went bankrupt and the consortium lost a fortune.. In sum.e. 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. which is more than double the benchmark. The study also found that. This risk is mitigated. . The forecaster's extremely poor track record for the few projects for which forecasting accuracy could be established. Other things being equal. by the fact that demand on airport rail links tend to be relatively inelastic to changes in fares. 3. These risks are high and have been proved significant through statistical testing. given the available evidence. probably because air passengers generally have a high value of time (Bradley. Changes in density and land use that were expected but did not materialize are a common cause of failed demand forecasts (Transportation Research Board. 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]”. Predicted demand for the rail line is partly dependent on increased density around stations. In sum. The forecaster being discredited in public by a national audit office for having “completely failed” and not even responding to the critique when invited. Thus a risk may exist that high fares could result in lower-thanforecasted demand. The forecaster's unwillingness or inability to document accuracy for their previous forecasts. like the one described here for the A-Train. the forecaster simply ignored the critique and did not bother to answer the auditor. and there are no defensible reasons they are. or has worked in the past. whereas higher distances from airports to the city edge and city center indicate higher rail use (Bradley. the average overestimate was 338% for the first-year estimate – i. two of which were forecast by the A-Train forecaster. Very few other businesses of this size would get away with not demonstrating the track record and quality of their product.

built from the mid 1990's. The accuracy of demand forecasting for bidding consortia and financial institutions has improved since the mid 1990's as more privately funded schemes. i. and with 50% confidence in the interval from 35% to 78% of forecast (see Table 8). Project type Actual/forecast demand 5 private projects 56 public projects All projects (61) 0. The ratio of actual to forecast demand is 0. provided the A-Train forecast is neither more nor less accurate than demand forecasts in the benchmark. namely that demand forecasts for privately funded projects are more overestimated than for publicly funded ones. Table 9 shows the ratio of actual to forecast demand for privately funded rail projects in the database. Two of the five privately funded projects in Table 9 are the two projects mentioned above under track record. have come to the market. Establishing expected outcome Step six establishes the expected outcome of the forecast. Given the evidence presented above. such as the A-Train.8 million forecasted passengers would not show up on the trains. Do private projects perform better than public ones? Step seven solicits comments from the forecaster regarding the previous six steps of the due diligence. Private ventures were found to be incentivized to inflate demand forecasts to make projects look good on paper in order to secure investor interest. 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.01 0. and especially for private-sector projects. according to the A-Train forecaster. Private funding is likely to curb bias in forecasting and result in more accurate forecasts. because it is a forecast for a privately funded project. Flyvbjerg / International Journal of Project Management 31 (2013) 760–774 12.0 769 2. Thus the A-Train forecaster's forecasts were the most inaccurate of all in the sample. 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. respectively.3 2. 13. Not only were these forecasts more inaccurate than public-sector forecasts.15–1. ramp up. and private funding is likely to result in more accurate forecasts.30 0. the forecaster's claim is undermined that the A-Train demand forecast is likely to be more accurate than the forecasts in the benchmark.. The majority of transportation infrastructure schemes – including the A-Train – has unique characteristics. With 90% confidence. Thus inaccuracy (bias) is more than twice as high for private schemes than for public ones. on average 30% of demand materialized for private projects versus 62% for public ones. clearly the data in the table do not support the A-Train forecaster's claims regarding higher forecasting accuracy for privately funded schemes.10 0. If the A-Train demand forecast is argued to be neither more or less accurate than the average rail demand forecast. for both claims it may be observed that the A-Train forecaster presented no evidence to support the claims. which found that demand forecasts for privately funded roads were significantly more inaccurate (overestimated) than demand forecasts for public roads. Demand shortfalls are thus likely to be larger than those shown in Table 8.23–1. resulting in large overcapacity and revenue shortfalls. the data supports the opposite conclusion. or 8.B. Although the number of private projects for which data are available is small. just as the forecaster presented no evidence to support the validity of the A-Train forecast itself. The A-Train demand forecast is therefore believed to be more accurate than the forecasts in the benchmark. with 80% confidence.2–14. mio 0. However.59 .2 4. they were also more inaccurate on average than the other private-sector forecasts presented in Table 9. Table 8 Expected outcome and confidence intervals for A-Train demand. actual demand would lie in the interval from 15% to 110% of forecast. Expected actual demand would then be 59% of forecast demand. This conclusion is supported by a large-sample study of toll roads carried out by Standard and Poor's (2004).62 0.30 for privately funded schemes and 0. 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. most likely the A-Train demand forecast is less accurate than the average rail demand forecast. Given the optimism documented above in the A-Train demand forecast regarding variance. for instance comparing the A-Train project to the rail projects in the benchmark. as done above. Therefore it is wrong to compare them to other projects. and for which first-year demand was overestimated by 175 and 500%.5 3. 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.62 for public schemes.e.78 8..35–0. first-year demand. In fact. in the interval from 23% to 101% of forecast. On this background. then one would expect an overestimate of 69% as shown above for the benchmark.9–11.1 million predicted. for which the A-Train forecaster had themselves done the forecast. Thus 5. etc.59 0. Again we therefore have to look elsewhere for evidence.1–15.3 million first-year passengers instead of the 14. the second in the next. Expected outcome With 90% confidence With 80% confidence With 50% confidence Actual/forecast demand First-year passengers. The first claim is covered in this section.

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

In a few cases. economists began to discuss the necessity of “firing the forecaster” (Akerlof and Shiller. In finance.3 million passengers during the first year of services. in fact. 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. but the A-Train demand forecast hides this for the time being by its optimism.. firing the forecaster may be letting off forecasters too easily. the forecaster's behavior also undermined trust when the forecaster: 1. which exposed financial forecasters' dubious practices. 6 2. 2. equivalent to actual demand being 59% of that forecasted. to provide documentation for their assumptions regarding ramp up and instead justified these by “professional judgment. 4. Second. In this case. The forecast is garbage. Flyvbjerg / International Journal of Project Management 31 (2013) 760–774 demand forecast in the benchmark. and which went bankrupt. including for the forecasters own previous forecasts. 5. 2009:146). 3. and as mismanaged as risks in the financial markets. i. they are being misinformed. as misunderstood. forecasts like this increase risk by systematically misleading decision makers and investors about the real risks involved.0 million passengers For the A-Train. Was unwilling or unable. This may well be changing with an AUD$150 million class action suit under way in Australia. upon request. A 50% chance that actual demand will fall in the interval of 35% to 78% of the forecast. 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. when.” which was later proven optimistic by actual data.e. instead of the forecaster's estimate of 14. Argued without evidence that because the A-Train is privately funded its demand forecast is more likely to be accurate. Had their forecasts for a multibillion-dollar high-speed rail project. i. of the type garbage-in-garbage-out. because it gives the client. The risk is very real that the A-Train faces a similar fate. also for major project investment decisions. 771 1. state-of-the-art demand forecast.1 million passengers. became a national scandal. which has an average overestimate of 69% (median 96%). to the best knowledge of the present author. This is a normal. 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. Fire the forecaster? Two observations may be made about the A-Train demand forecast.. but the forecast is unlikely to be a statistical outlier. 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.e. An overestimate of 69%. . thoroughly debunked by a national audit office and did not respond to the critique when invited to do so. then the promoter should ask to have their money back on the grounds that the forecaster has delivered a faulty product. given the evidence presented above. Instead of reducing risk in decision making. and had to go through painful financial restructuring. and others who use the forecast. But here. In addition to the forecaster's numbers being a cause of concern. 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. when evidence shows that such comparisons are justified and are mandatory elsewhere. However. Thus 5. the impression that they are being informed about future demand. if the promoter who commissioned and paid for the original A-Train demand forecast requested a valid and reliable forecast. as described and assessed above: 6 Most likely. then investors may consider seeking compensation for damages caused by the conspiracy. upon request. that the A-Train demand forecast is more overestimated than the benchmark.9–11. given the available evidence. most likely both the overestimate and the shortfall will be larger than these figures. and probably more so because data about project risks are less available than are data about market risks. So far. the forecast will prove to be less accurate than the benchmark. against the traffic and revenue forecaster for the Clem 16. criminal penalties may be in place. too. This is prudent advice.B. like thousands of such forecasts made every year at substantial cost to clients. Was unwilling or unable. In fact. for the losses they incur. As a consequence. when evidence indicates that the exact opposite is the case. This advice was followed by the investor who commissioned the due diligence presented here. risks for major project investments like the A-Train are at least as large. as explained above. then one would predict the following: 1.8 million of the forecasted passengers would most likely never show up on the train service 2. including for UK government-funded projects. which was similar to the A-Train. The opposite is more likely. Some forecasts are so grossly misrepresented and have such dire consequences that we need to consider not only firing the forecasters but suing them. In general. the forecast can be argued to be worse than garbage. where forecasters foreseeably produce deceptive forecasts. no forecaster has been sued for an inaccurate forecast. The investor decided not to invest in the A-Train. biased forecasts and bad risk assessments led to the 2007–2009 market collapse. that is. First. documented above. Argued without evidence that the A-Train is unique and may therefore not be compared to other projects. to document accuracy of their previous forecasts. 8. if the damage caused by forecasters is severe enough. investors. 4. the promoter may also consider to later seek compensation from the forecaster for possible damages caused by the faulty forecast.

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

2007.). B. B. CA.. DC. Younossi. The Complete Guide to Sarbanes-Oxley. Morris. (2) a case study with empirical test and demonstration of the proposed methodology. Dantata.. Princeton University Press... Avon. B. Princeton. Impacts of changed or new incentives should be studied not just for individual forecasters but across the wider forecasting community. C. This in itself should have a sobering effect on forecasters. B.. Such legislation is aimed at corporate fraud and in many contexts fraudulent forecasts may be considered part of corporate fraud.. 344–367. cures. 3. Transportation Research A 39 (6). Ashwin Mahalingam. Such statistical analyses would inform further development of both the theory and methodology of quality control and due diligence in project management.. A.. Sydney. Rheden. Including Financial Management Model and Risk Management for Construction Projects (November 18.E. National Academie. Areas for further research The present paper has taken a first step in researching a much-neglected problem in scholarly work on project management. Oxford Review of Economic Policy 25 (3). Survival of the unfittest: why the worst infrastructure gets built..H. Molin.). Geraldi... is likely to be an interesting case study in this context. 67 pp. and (3) incentives for getting front-end estimates right. Measuring inaccuracy in travel demand forecasting: methodological considerations regarding ramp up and sampling. signifies progress (United States Congress. causes. G. and social and environmental impact assessments that typically support decisions on projects – are often significantly different from actual ex post costs and benefits. D.C. Santa Monica. Flyvbjerg. Studies should cover the full range of outcome variables and not just demand as in the case study above. retrieved April 7. and Why It Matters for Global Capitalism. RAND Corporation. Shiller. 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