Optimism bias is the demonstrated systematic tendency for appraisers to be over-optimistic about key project parameters. It must be accounted for explicitly in all appraisals, and can arise in relation to:
- Capital costs
- Works duration
- Operating costs
- Under delivery of benefits
To minimize the level of optimism bias in appraisal, best practice suggests that the following actions should be taken:
- Project managers, suitably competent and experienced for the role, should be identified
- Project sponsor roles should be clearly defined
- Recognised project management structures should be in place
- Performance management systems should be set up
For large or complex projects:
- Simpler alternatives should be developed wherever possible
- Consideration should be given to breaking down large, ambitious projects into smaller ones with more easily defined and achievable goals
- Knowledge transfer processes should be set up, so that changes in individual personnel do not disrupt the smooth implementation of a project
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