From Nobel Prize to Project Management: Getting Risks Right

Project Management Journal, vol. 37, no. 3, pp. 5-15

32 Pages Posted: 23 Mar 2013 Last revised: 12 Jun 2013

Bent Flyvbjerg

University of Oxford - Said Business School

Date Written: August 1, 2006

Abstract

A major source of risk in project management is inaccurate forecasts of project costs, demand, and other impacts. The paper presents a promising new approach to mitigating such risk based on theories of decision-making under uncertainty, which won the 2002 Nobel Prize in economics. First, the paper documents inaccuracy and risk in project management. Second, it explains inaccuracy in terms of optimism bias and strategic misrepresentation. Third, the theoretical basis is presented for a promising new method called "reference class forecasting," which achieves accuracy by basing forecasts on actual performance in a reference class of comparable projects and thereby bypassing both optimism bias and strategic misrepresentation. Fourth, the paper presents the first instance of practical reference class forecasting, which concerns cost forecasts for large transportation infrastructure projects. Finally, potentials for and barriers to reference class forecasting are assessed.

Keywords: risk management, project forecasting, forecast models

Suggested Citation

Flyvbjerg, Bent, From Nobel Prize to Project Management: Getting Risks Right (August 1, 2006). Project Management Journal, vol. 37, no. 3, pp. 5-15. Available at SSRN: https://ssrn.com/abstract=2238013

Bent Flyvbjerg (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

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