Adjusting for optimism bias
From the The Money Files Blog
by Elizabeth Harrin
A blog that looks at all aspects of project and program finances from budgets, estimating and accounting to getting a pay rise and managing contracts.
Written by Elizabeth Harrin from RebelsGuideToPM.com.
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Let’s not kid ourselves: optimism bias creeps into most things we do. I’m certainly guilty of it: “Yes, of course I can finish that slide deck for the board today, even though I’ve done nothing on it yet.”
Project teams at all levels of experience and in all sectors tend to approach their work optimistically; it’s human nature. In UK government projects, they even have a process for addressing optimism bias. Estimates are expected to explicitly adjust for bias when stating the costs and benefits. I think this is fantastic. It forces people to think about what is realistic and what bias they might be bringing to the table. It helps highlight risk too.
The published Guide to Developing the Project Business Case also talks about adjusting the adjustments down again when there is some performance-based evidence to show that the project is progressing to plan. So we don’t have to worry about padding the estimates forever – they can be readjusted as and when you have more specific, data-driven information to include in the forecasts.
The guidance even includes what percentage increase to use on your estimates to counteract the effects of bias. Of course, you can choose to use whatever you feel is the best adjusted value, but the numbers given for time and cost are based on a study by Mott MacDonald and are a good starting point if you don’t have internal data to draw from.
(As an aside, if you don’t have internal data to draw from, what are you doing to start building up that repository of information? Given the amount of data we capture in our project management tools these days, and the prevalence of AI tools to help us interpret and interrogate it, we really should be setting ourselves up to rely on our own data sources instead of industry-aggregated ones. But in the absence of your data source being substantive enough on its own at this time, do tap into published data sources as a starting point.)
For example, the suggestion is that for a software development project, you should add 54% on to the schedule! I’m not sure my stakeholders would agree with that as it seems an awful lot of padding. However, past experience tells me that this is probably not far from the mark realistically. 54% is the top bracket – you could opt to add the lower bracket of 10% or anywhere in between.
It also suggests adding between 10 and 200% to the project budget to bring you more in line with something you can realistically achieve. Again, I’m not sure my sponsor would go for doubling my budget ‘just because’ but I think these numbers open up the conversation to allow us to talk about risk and the validity of estimates.
The guidance suggests that you start with the upper limit and then work back from that based on whether you feel the optimism bias can be or has been reduced. For example, have risks been managed, have estimates been fully throught through in a robust way and benchmarked across industry actual results and so on.
If you do take this approach, make sure that everything is documented and you can explain your rationale for adding an adjusted figure – including why you haven’t been able to mitigate against optimism bias (yet). Stay transparent and keep talking about what it means for the project.
What do you think of this approach? Let us know in the comments!
Posted on: July 11, 2023 08:00 AM |
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Comments (3)
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Luis Branco
CEO| Business Insight, Consultores de Gestão, Ldª
Carcavelos, Lisboa, Portugal
Dear Elizabeth
Very interesting the theme that brought to our reflection and for debate
Thanks for sharing and for the: "GUIDE TO DEVELOPING THE
PROJECT BUSINESS CASE"
Cone-based planning and uncertainty
Are there, in your opinion, many sponsors who accept this approach?
Hi Luis, I'm not sure that many of them would have heard about the approach, but I think we could present it. Some sponsors will definitely be open to the idea of it - I'd hope!
By consciously adjusting for optimism bias in project management, organizations can enhance their ability to deliver projects on time, within budget, and with the desired scope. This proactive approach fosters more accurate planning, risk management, and decision-making throughout the project lifecycle.
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