I recently came across the “Olympic Proportions: Cost and Cost Overrun at the Olympics 1960-2012” article published by Bent Flyvbjerg in 2012. One of the figures that really got my attention was a table describing the actual costs and budget overruns of the Olympic Games between 1968 and 2012 (see Table 1).
Inspection of this table and the numbers got me thinking once more about our inability to learn from our mistakes and budget our projects properly. Then I remembered and article I have written some time ago titled “Project Underestimation: Mass Delusion or the Machiavelli Factor?”
There are currently three theories attempting to explain our helplessness when it comes to accurate project estimation. In a nutshell, here are explanations by three different schools of thought:
- The Standard Economic Theory Explanation - If companies take rational risks in order to earn abnormal incomes, these poor outcomes are inevitable. One of the key laws of the financial theory states that in a perfect market, the higher the expected return of an asset, the higher is the inherent risk associated with it.
- The "Mass Delusion" Explanation - Modern business decision making is seriously flawed because of the delusional optimism (optimism bias) that forces people to overestimate the benefits and underestimate the costs of future projects.
- The Machiavelli Factor Explanation – executives and politicians are deliberately cooking the books in order to make the project proposals look more attractive. In addition, executives are rewarded with heavy incentives for rosy forecasts and face very minor penalties when their predictions proved to be wrong.
I personally tend to lean towards the blend of theories #2 and #3. In my experience the following happens:
- Projects in the private sector - 50% optimism bias and 50% Machiavelli factor
- Projects in the government sector – 25% optimism bias and 75% Machiavelli factor
So, having voiced my opinion on the topic, what is yours?