Optimism bias, strategic misinterpretation and reference class forecasting
Multi-National corporations completing large-scale projects face potential high cost overruns and possible overestimations on initial budgets. Through these, sometimes unrealized setbacks, the corporations are not operating at maximum possible efficiency. This can happen through a number of factors such as a poor allocation of resources, lacking a sufficient standard of managerial skills, Optimism Bias and Strategic Misinterpretation.
A Danish geographer by name of Bent Flyvbjerg did extensive research into cost overrun and benefit shortfall of major projects, with additional studies into hypothetical solutions. Through his investigation, Flyvbjerg realised that the cost and benefit shortfall of major projects could be better understood by filtering the wide topic into two sub-topics, Optimism Bias and Strategic Misrepresentation. Through further analysis into the study area, a possible solution to this problem was first found through the use of the Reference Class Forecasting approach (RCF). RCF approach helps by providing a less skewed and opinionated view on a specific subject by using the 'Outside View' instead of the commonly applied 'Inside View'. The over-arching goal is to reduce cost overrun and benefit shortfall by engaging all aspects to increase forecasting accuracy.
Through reading this article, a clear and succinct explanation of the strategies and ideas mentioned above will be discussed. A brief analysis will be given on how it is used in business practice to increase efficiency and a detailed paragraph of the studies' limitations as a theory will also be covered.
Optimism bias by definition is a form of cognitive bias. This bias refers to the belief that there are reduced negative externalities about a specific situation. Factors that contribute to Optimism bias is if an individual or corporation has a more informative view of the desired end state of the project, the cognitive mechanisms in use, the information the individual or company has to begin with and the overall mood of the project scope. All these factors significantly contribute to the bias, potentially skewing judgement on a project. Optimism bias can be both positive and negative, for example, an overoptimistic overall outcome of a project's benefits can lead to poor planning, budgeting and other factors in the early stages of the project portfolio. However, an increased Optimism Bias can be seen as quite a positive aspect of a business plan. An over-confidence in the desired outcome would increase expectations of an individual or company as it is falsely made to look that it is easier to achieve.
Although this sounds negative if not met, increased expectations help people in a corporation and the business its self, grow considerably as the company will continuously strive for potential new feats. Not only are potential higher target reached, but self-satisfaction is drastically increased no matter the outcome as noted by Psychologists Margaret Marshall and John Brown's theory of Optimism Bias presented by Associate Professor of Cognitive Neuroscience Tali Sharot in a TED talk Cite error: Closing </ref> missing for <ref> tag
- ↑ 1.0 1.1 "The effect of optimism bias on the decision to terminate failing projects" https://www.pmi.org/learning/library/optimism-bias-terminate-failing-projects-3779 Writer- Meyer, Werner G., 2014 Accessed 15 feb 2018
- ↑ |last=Flyvberg |first=Bent |date=2006 |website=https://www.pmi.org/learning/library/nobel-project-management-reference-class-forecasting-8068s |access-date=24 February 2018}} Doe, John (2006). "From Nobel Prize to project management getting risks right". Encyclopedia of Things. Retrieved 24 February 2018. []
- ↑ "Curbing Optimism Bias and Strategic Misrepresentation in Planning: Reference Class Forecasting in Practice" http://peakconsulting.dk/Portals/0/media/PMO-forum/23-nov-2011/Flyvbjerg_2008_CurbingOptimismBiasAndStrategicMisrepresentationInPlanningReferenceClassForecastingInPractice.pdf Writer- Bent Flyvberg, May 2006 Accessed 16 feb 2018
- ↑ "From Nobel Prize to project management-getting risks right" https://www.pmi.org/learning/library/nobel-project-management-reference-class-forecasting-8068 Writer- Bent Flyvberg, 2006 Accessed 18 feb 2018
- ↑ https://www.pmi.org/learning/library/practical-application-empirical-evaluation-rcf-10277 Writer- Batselier, J. & Vanhoucke, M., October 2016 Accessed 19 feb 2018
- ↑ http://www.emeraldinsight.com/doi/abs/10.1108/IJMPB-07-2016-0063 Writer- Jame Prater, Konstantinos Kirytopoulos, Tony Ma, November 2016 Accessed 14 feb 2018
- ↑ "The Optimism Bias" https://www.ted.com/talks/tali_sharot_the_optimism_bias/transcript Writer- Tali Sharot, 2012 Accessed 12 feb 2018
- ↑ https://www.youtube.com/watch?v=MzNpH6nHTuo Writer- Decision skills, October 2016 Accessed 21 feb 2018
- ↑ https://www.youtube.com/watch?v=X9w9LTR-xSc Writer- Saïd Business School, University of Oxford, 2016 Accessed 22 feb 2018
- ↑ https://www.youtube.com/watch?v=Bx-lq_pOsUk&t=234 Writer- Saïd Business School, University of Oxford, 2016 Accessed 22 feb 2018
- ↑ https://en.wikipedia.org/wiki/Socrates Writer- Unknown, Feb 2018 Accessed 24 feb 2018
- ↑ https://www.youtube.com/watch?v=ZO-CGN78gdY Writer- Thunk, 2016 Accessed 22 feb 2018