Reference-class forecasting

One of the cures for optimism bias, or what Flyvbjerg (see previous post) less diplomatically calls “lying”, is reference-class forecasting.

The idea is simple, see this brief article by Lovallo & Kahneman, and the paper by Flyvbjerg, Procedures for Dealing with Optimism Bias in Transport Planning: Guidance Document,

(1) Identification of a relevant reference class of past projects. The class must be broad enough to be statistically meaningful but narrow enough to be truly comparable with the specific project.

(2) Establishing a probability distribution for the selected reference class. This requires access to credible, empirical data for a sufficient number of projects within the reference class to make statistically meaningful conclusions.

(3) Compare the specific project with the reference class distribution, in order to establish the most likely outcome for the specific project.

flyvbjerg-rail-cost-overruns.jpg

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