Optimism bias is the demonstrated systematic tendency for people to be over-optimistic about the outcome of planned actions. People tend to see the future through "rose-colored glasses," as the saying goes. Optimism bias applies to professionals and laypeople alike. Optimism bias arises in relation to estimates of costs and benefits and duration of tasks. It must be accounted for explicitly in appraisals, if these are to be realistic. Optimism bias typically results in cost overruns, benefit shortfalls, and delays, when plans are implemented. The law of costs is typical of common law jurisdictions. ... Social welfare can be taken to mean the welfare or well-being of a society. ... Cost overrun is defined as excess of actual cost over budget. ...

The UK government explicitly acknowledges that optimism bias is a problem in planning and budgeting and has developed measures for how to deal with optimism bias in government (HM Treasury 2003). The UK Department for Transport requires project planners to use so-called "optimism bias uplifts" for large transport projects in order to arrive at accurate budgets for planned ventures (Flyvbjerg and Cowi 2004). The United Kingdom is a unitary state and a democratic constitutional monarchy. ...

In a debate in Harvard Business Review, between Daniel Kahneman, Dan Lovallo, and Bent Flyvbjerg, Flyvbjerg (2003) – while acknowledging the existence of optimism bias – pointed out that what appears to be optimism bias may on closer examination be strategic misrepresentation. Planners may deliberately underestimate costs and overestimate benefits in order to get their projects approved, especially when projects are large and organizational and political pressures high. Kahneman and Lovallo (2003) maintained that optimism bias is the main problem. November 2005 issue of the Harvard Business Review. ... Daniel Kahneman Daniel Kahneman (born March 5, 1934 in Tel Aviv, in the then British Mandate of Palestine, now in Israel), is a key pioneer and theorist of behavioral finance, which integrates economics and cognitive science to explain seemingly irrational risk management behavior in human beings. ...

Sources and further readings

Flyvbjerg, Bent, 2003. "Delusions of Success: Comment on Dan Lovallo and Daniel Kahneman." Harvard Business Review, December Issue, pp. 121-122.

Flyvbjerg, Bent and Cowi, Procedures for Dealing with Optimism Bias in Transport Planning: Guidance Document (London: UK Department for Transport, June 2004). 61 pp.

Flyvbjerg, Bent, Mette K. Skamris Holm, and Søren L. Buhl, "Underestimating Costs in Public Works Projects: Error or Lie?" Journal of the American Planning Association, vol. 68, no. 3, Summer 2002, pp. 279-295.

HM Treasury, Supplementary Green Book Guidance: Optimism Bias (London: HM Treasury, 2003).

Kahneman, Daniel and Dan Lovallo, 2003. "Response to Bent Flyvbjerg." Harvard Business Review, December Issue, p. 122.

Lovallo, Dan and Daniel Kahneman, 2003. "Delusions of Success: How Optimism Undermines Executives' Decisions," Harvard Business Review, July Issue, pp. 56-63.

See also

• Cost-benefit analysis
• Cost overrun
• Cost underestimation
• Benefit shortfall
• Delay
• Planning fallacy
• Risk
• Rosy retrospection