Planning fallacy and cost overruns

 

A chara, – There has been a great deal of controversy and comment on the now expected large cost overruns on the new National Children’s Hospital.

Rather than asking why this has occurred it may be more appropriate to ask why is this such a surprise?

The phenomenon of individuals underestimating the time and cost of a project is pervasive and is a classic example of what has been called the “planning fallacy” by psychologists Daniel Kahneman and Amos Tversky.

An infamous example is the new Scottish parliament building which went ten times over budget and took several years longer than expected.

This looks positively prudent compared to the Sydney Opera House which was 14 times over budget and took 10 additional years.

A 2016 study of the Olympic Games found an average cost overrun, in real terms, of 156 per cent with almost half the games over-running by at least 100 per cent. More local examples can easily be found.

Two points are worth noting. First, this pervasive optimism is not due to ignorance or stupidity: those with relevant expertise make these mistakes. Second and crucially, outside observers are not prone to such errors (and indeed may be pessimistic, if anything).

This suggests a need for projections of the future costs of large infrastructural developments that are completely independent of those backing or managing the projects – much as the Fiscal Advisory Council provides invaluable independent assessments of macroeconomic policy.

The additional costs of such projections would be tiny compared to the risks to the exchequer (and taxpayer).

Not doing so is likely to mean similar debacles in the future, perhaps starting with the already delayed relocation of the National Maternity Hospital to the St Vincent’s campus. – Yours, etc,

KEVIN J DENNY,

Associate Professor,

School of Economics,

University College Dublin,

Dublin 4.