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Optimism Bias

ESRI report warns of effect of 'optimism bias' on value of infrastructure projects

A new study from the ESRI says that rail projects typically overestimate their projected passenger levels, while road projects underestimate their traffic growth.

STATE INFRASTRUCTURE projects often fall victim to a ‘optimism bias’ which leads them to overspend and inaccurately project passenger and traffic figures for major rail and road projects, according to a new report.

A study of international evidence by the  ESRI’s Dr Edgar Morgenroth is being presented at an ESRI conference on improving productivity and growth today.

Most of the public projects examined in the study overran their budgets by between 20 per cent and 45 per cent.

Meanwhile, the study also found that road projects typically underestimate the expected volume of traffic, while rail projects overestimate the projected number of passengers.

In his study, Morgenroth says that investment decisions have to be taken very carefully, given that even in ‘normal’ economic times the demand for potential projects is far higher than the available resources for projects. He recommends careful cost benefit analysis prior to beginning a project to better evaluate their future value and help prioritise projects.

He also says that wider assessment of optimum bias (or not) in Irish infrastructure projects would help protect the taxpayer from future overspending and the under-utilisation of infrastructure.

The study notes that just because a project came in on budget, it does not mean that the costs of that project were the cheapest available options.

Morgenroth’s paper is one of a series of 12 studies being undertaken by the ESRI to assess issues relating to the state’s ongoing economic crisis. He recommends further assessment of infrastructure projects in Ireland to investigate the extent of optimum bias.

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