Strategic Misrepresentation

What it is

The term comes from a 2002 paper in the Journal of the American Planning Association, "Underestimating Costs in Public Works Projects: Error or Lie?". The authors define lying in the conventional way and use "strategic misrepresentation, i.e., lying" for the deliberate underestimation of cost. The title states the question the paper tests.

They sort the possible explanations for cost underestimation into three families. Technical explanations cover imperfect techniques, inadequate data, honest mistakes, the inherent difficulty of predicting the future and lack of experience. Psychological explanations centre on appraisal optimism, in which promoters and forecasters are overly optimistic in the planning and decision phase. Political and economic explanations hold that underestimation is deliberate, driven by interests and power: stakeholders gain when a project goes ahead, and the lower number is what gets it approved. The first two families describe error. The third describes a choice.

In effect

The sample was 258 transport infrastructure projects worth US$90 billion in 1995 prices, in 20 countries on five continents, completed between 1927 and 1998. Cost escalation was measured as actual costs minus estimated costs, as a percentage of estimated costs, where estimated costs were those budgeted or forecast at the decision to build. Costs were underestimated in 86 per cent of projects, by 27.6 per cent on average. Rail averaged 44.7 per cent, bridges and tunnels 33.8 per cent and roads 20.4 per cent. The authors state that the sample is probably biased conservatively, so the true escalation is likely to be higher.

They then tested the families against the data. The error distribution had a mean different from zero (p below 0.001), which a purely technical account does not predict. Estimates did not improve over time, whether measured by year of decision (p = 0.22) or year of completion (p = 0.28), and they argued that learning should have reduced both honest mistakes and optimism over decades. Of the psychological account they wrote that optimism calculated on the basis of incentives is not optimism, and called it deliberate deception. They opted for the political and economic explanations. Their recommendation followed from that choice: do not trust cost estimates from project promoters and their analysts, and build institutional checks and balances, including financial, professional or even criminal penalties for consistently foreseeable estimation errors. The four accountability instruments they name are greater transparency, performance specifications, explicit regulatory regimes and the involvement of private risk capital, even in public projects.

The authors place their work against earlier literature. Martin Wachs had interviewed American transit planners, officials and consultants in work published in 1986, 1989 and 1990 and concluded that forecasts were best explained by lying. The 2002 authors describe his evidence as small in sample and largely circumstantial, and say his claim that forecasts always run low overstates the case, since their data show 86 per cent.

In a 2003 comment in the Harvard Business Review on an article by Dan Lovallo and Daniel Kahneman, Flyvbjerg praised their analysis of overoptimism, anchoring, competitor neglect and the outside view, and argued that they underweight forecasts that are deliberately manipulated to get projects started. Because forecasters had not improved over time, he wrote, political explanations fitted his data better than optimism did.

What it does not say

The 2002 authors hedge their own conclusion. They do not claim to have proved lying. They claim that the data support the lying hypotheses and give them statistical significance, and they say that establishing intent needs further research, such as interviews or surveys of the people who produced the estimates. An outcome record shows the size and persistence of a gap. It cannot show what was in anyone's mind.

It also does not rule out the account it competes with. Roger Buehler and colleagues found in 1994 that students writing honours theses finished in 55.5 days on average against a mean best estimate of 33.9, in a setting where nobody stood to gain by flattering a thesis deadline. A bias in how plans are imagined can therefore exist without an incentive, and the two explanations may both operate in public works. The disagreement is about weight and about remedy. A bias in imagination can be met by changing what planners look at, and a motive to understate needs a checker with no stake in the approval.

The sample is public transport infrastructure. The paper does not claim that the same share of private projects, or projects in other sectors, is misrepresented.

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