Deception in large infrastructure projects: Two models for explaining and preventing executive disaster

California Management Review

Volumn 51, Issue 2, 2009, Pages

  Flyvbjerg, Bent ^a,b   Garbuio, Massimo ^c   Lovallo, Dan ^d  

^a AALBORG UNIVERSITY   (Denmark)

^b DELFT UNIVERSITY OF TECHNOLOGY   (Netherlands)

^c UNIVERSITY OF WESTERN AUSTRALIA   (Australia)

^d UNIVERSITY OF SYDNEY   (Australia)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 65249165995     PISSN: 00081256     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (88)

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2. "Under Water Over Budget," The Economist, October 7, 1989, pp. 37-38.
3. B. Flyvbjerg, "Design by Deception: The Politics of Megaproject Approval," Harvard Design Magazine, 22 (2005): 50-59.
4. B. Flyvbjerg, M.S. Holm, and S. Buhl, "Underestimating Costs in Public Works Projects: Error or Lie?" Journal of the American Planning Association, 68/3 (Summer 2002): 279-295.
5. B. Flyvbjerg, "Cost Overruns and Demand Shortfalls in Urban Rail and Other Infrastructure," Transportation Planning and Technology, 30/1 (February 2007): 9-30.
6. J.D. Ford, "The Effects of Causal Attribution on Decision Makers' Responses to Performance Downturns," Academy of Management Review, 10/4 (October 1985): 770-786;
7. S.E. Clapham and C.R. Schwenk, "Self-Serving Attributions, Managerial Cognition, and Company Performance," Strategic Management Journal, 12/3 (March 1991): 219-229.
8. D. Lovallo and D. Kahneman, "Delusions of Success: How Optimism Undermines Executives' Decisions," Harvard Business Review, 81/7 (July 2003): 56-63.
9. Ford (1985), op. cit.; Clapham et al. (1991), op. cit.
10. R. Buehler, D.W. Griffin, and M. Ross, "Exploring the 'Planning Fallacy': Why People Underestimate Their Task Completion Times," Journal of Personality and Social Psychology, 77 (1994): 366-381.
11. D. Kahneman and D. Lovallo, "Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking," Management Science, 39/1 (January 1993): 17-31.
12. Of course, selfishness is a psychological phenomenon, but one that is accepted by neo-classical economists.
13. D. Kahneman and A. Tversky, "Intuitive Predictions: Biases and Corrective Procedures," in S. Makridakis and S.C. Wheelwright, eds., "Forecasting," TIMS, Studies in Management Science, 12 (1979): 313-327;
14. Kahneman and Lovallo (1993), op. cit.;
15. Lovallo and Kahneman (2003), op. cit.
16. Lovallo and Kahneman (2003), op. cit.
17. Buehler et al. (1994), op. cit.
18. Buehler et al. (1994), op. cit.; R. Buehler, D.W. Griffin, and H. MacDonald, "The Role of Motivated Reasoning in Optimistic Time Predictions," Personality and Social Psychology Bulletin, 23/3 (1997): 238-247;
19. I.R. Newby-Clark, I. McGregor, and M.P. Zanna, "Thinking and Caring About Cognitive Inconsistency: When and For Whom Does Attitudinal Ambivalence Feel Uncomfortable?" Journal of Personality and Social Psychology, 82 (2002): 157-166.
20. Flyvbjerg, Holm, and Buhl (2002), op. cit.; Mott MacDonald, Review of Large Public Procurement in the UK (London: HM Treasury, 2002);
21. National Audit Office, PFI: Construction Performance, Report by the Controller and Auditor General (London: HMSO, 2003);
22. National Audit Office, PFI: Construction Performance, Report by the Controller and Auditor General (London: HMSO, 2005).
23. U. Malmendier and G.A. Tate, "Who Makes Acquisitions? CEO Overconfidence and Market's Reaction," Stanford Research Paper No. 1798, 2003.
24. T. Dune, M.J. Roberts, and L. Samuelson, "Patterns of Firm Entry and Exit in U.S. Manufacturing Industries," Rand Journal of Economics, 19/4 (Winter 1988): 495-515;
25. Lovallo and Kahneman (2003), op. cit.
26. A. Tversky and D. Kahneman, "Judgment Under Uncertainty: Heuristics and Biases," Science, 185 (1974): 1124-1131.
27. Tversky and Kahneman (1974), op. cit.
28. K.A. Diekmann, A.E. Tenbrunsel, P.P. Shah, H.A. Schroth, and M.H. Bazerman. "The Descriptive and Prescriptive Use of Previous Purchase Price in Negotiations," Organizational Behavior and Human Decision Processes, 66/2 (1996): 179-191.
29. B. Flyvbjerg, N. Bruzelius, and W Rothengatter, Megaprojects and Risk: An Anatomy of Ambition (New York, NY: Cambridge University Press, 2003).
30. E.M. Merrow, P.E. Phillips, and C.W. Meyers, Understanding Cost Growth and Performance Short-falls in Pioneer Process Plants (Santa Monica, CA: Rand Corporation, 1981).
31. M.C. Jensen and W.H. Meckling "Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure," in M.C. Jensen, Theory of the Firm: Governance, Residual Claim, and Organizational Forms (Cambridge, MA: Harvard University Press, 2001).
32. P. Bolton and D.S. Scharfstein, "Corporate Finance, the Theory of the Firm, and Organizations," Journal of Economic Perspectives, 12/4 (Autumn 1998): 95-114.
33. B. Flyvbjerg and Cowi, Procedures for Dealing with Optimism Bias in Transport Planning: Guidance Document (London: UK Department for Transport, 2004).
34. Flyvbjerg (2005), op. cit, pp. 50-59.
35. Flyvbjerg's personal communication with Kim Utzon.
36. Flyvbjerg and Cowi (2004), op. cit.
37. K. Trapenberg Frick, "The Cost of the Technological Sublime: Daring Ingenuity and the New San Francisco-Oakland Bay Bridge," in H. Priemus, B. Flyvbjerg, and B. van Wee, eds., Decision-Making on Mega-Projects: Cost-Benefit Analysis, Planning, and Innovation (Northamton, MA: Edward Elgar, 2008).
38. D.H. Pickrell, Urban Rail Transit Projects: Forecasts versus Actual Ridership and Cost (Washington, D.C.: U.S. Department of Transportation, 1990);
39. D.H. Pickrell, "A Desire Named Streetcar: Fantasy and Fact in Rail Transit Promotions and Evaluation," Journal of the American Planning Association, 58/2 (1992): 158-176.
40. Flyvbjerg and Cowi (2004), op. cit.
41. A. Altshuler and D. Luberoff, Mega-Projects: The Changing Politics of Urban Public Investment (Washington, D.C.: Brookings Institution, 2003);
42. K.J. Delaney and R. Eckstein, Public Dollars, Private Stadiums: The Battle Over Building Sports Stadiums (New Brunswick, NJ: Rutgers University Press, 2003);
43. P.W.G. Morris and G.H. Hough, The Anatomy of Major Projects: A Study of the Reality of Project Management (New York, NY: John Wiley and Sons, 1987).
44. Ibid.
45. HM Treasury, The Green Book: Appraisal and Evaluation in Central Government (London: Treasury Guidance TSO, 2003);
46. Flyvbjerg and Cowi (2004), op. cit.
47. B. Flyvbjerg, M.S. Holm, and S. Buhl, "What Causes Cost Overrun in Transport Infrastructure Projects?" Transport Reviews, 24/1 (2004): 3-18.
48. The problem of accountability in public and private organizations has been extensively discussed in M. Bovens, The Quest for Responsibility: Accountability and Citizenship in Complex Organizations (Cambridge: Cambridge University Press, 1998);
49. M. Bovens, "Analyzing and Assessing Accountability: A Conceptual Framework," European Law Journal, 13/4 (2007): 447-468.
50. Kahneman and Lovallo (1993), op. cit.
51. A. Cooper, C Woo, and W. Dunkelberg, "Entrepreneurs' Perceived Chances of Success," Journal of Business Venturing, 3/2 (Spring 1988): 97-108.
52. J. Farrell, "Cheap Talk, Coordination, and Entry," Rand Journal of Economics, 18/1 (Spring 1987): 34-39
53. Flyvbjerg et al. (2002), op. cit.
54. Flyvbjerg et al. (2005), op. cit.
55. W. Chen, "Analysis of Rail Transit Project Selection Bias with an Incentive Approach," Planning Theory, 6/1 (March 2007): 69-94.
56. Flyvbjerg et al. (2005), op. cit., p. 139-40.
57. Flyvbjerg et al. (2005), op. cit.
58. In this section, "incentive" is used in a very broad sense, including changes in governance structures and control mechanisms. We thank an anonymous reviewer for pointing this out.
59. Flyvbjerg (2006), op. cit., pp. 5-15.
60. C. Caringal, D. Lovallo, and C. Camerer, "Similarity Based Forecasting," AGSM Working Paper, 2007.
61. B. Flyvbjerg, "Policy and Planning for Large-Infrastructure Projects: Problems, Causes, Cures," Environment and Planning B: Planning and Design, 34 (2007): 578-597.
62. Flyvbjerg, Bruzelius, and Rothengatter (2003), op. cit.
63. Department for Transport, "Consultation on Changes to the Policy on Funding Major Projects: Local Authority Major Schemes," 2006a, London.
64. Ibid, ¶ 5.
65. Ibid, ¶ 38-39.
66. Department for Transport, "Transport Analysis Guidance (TAG), Unit 3.5.9, The Estimation and Treatment of Scheme Costs," 2006b, London, ¶ 3.3.7.
67. Flyvbjerg, Bruzelius, and Rothengatter (2003), op. cit., p. 120-123.
68. In the U.S., after the Sarbanes-Oxley Act was passed in 2002 in response to corporate scandals with Enron, Tyco, WorldCom, and others, CEOs and CFOs of publicly traded companies have become criminally liable for misleading shareholders about financial projections, including cost, revenue, and risk estimates.
69. On the contrary, the "winner's curse" reflects the fact that the winning bid exceeds the real value of the prize.
70. In a Public Private Partnership (PPP), a single contractual arrangement combines a series of separate arrangements, such as the design, building, financing, ownership, and maintenance. DBFOM is only one example of it. Build-Own-Operate and Transfer (BOOT) and Build-Own and Operate (BOO) indefinitely are other cases. These arrangements are often contrasted with traditional procurement methods, such as Design and Build (DB), where a private entity engages only in the design and building of the infrastructure. Mott Macdonald [(2002), op. cit.] discusses performance of traditional procurement and PPP in 50 large UK infrastructure projects.
71. D. Kahneman, "New Challenges to the Rationality Assumption," Journal of Institutional and Theoretical Economics, 150 (1994): 18-36;
72. Kahneman and Tversky (1979), op. cit.;
73. Lovallo and Kahneman (2003), op. cit.;
74. Flyvbjerg (2006), op. cit.
75. Kahneman and Tversky (1979), op. cit.
76. Kahneman and Lovallo (1993), op. cit.
77. In judging the likelihood or frequency of an event, decision makers tend to rely on information that is easy to recall. On the availability heuristic, see A. Tversky and D. Kahneman, "Availability: A Heuristic for Judging Frequency and Probability," Cognitive Psychology, 5 (1973): 207-232.
78. This discussion is based on Kahneman and Tversky (1979), op. cit.
79. B. Flyvbjerg and Cowi, Procedures for Dealing with Optimism Bias in Transport Planning: Guidance Document (London: UK Department for Transport, 2004).
80. Ove Arup & Partners Scotland, Scottish Parliament, Edinburgh Tram Line 2 Review of Business Case (Scotland: West Lothian, 2004), pp. 15-16.
81. The Scotsman, June 6, 2007.
82. Caringal et al. (2007), op. cit.
83. M. Wachs, "Ethics and Advocacy in Forecasting for Public Policy," Business and Professional Ethics Journal, 9/1-2 (Spring-Summer 1990): 141-157.
84. L. Merewitz, "Cost Overruns in Public Works," in W. Niskanen, A.C. Hansen, R.H. Havemann, R. Turkey, and R. Zeckhauser, eds., Benefit Cost and Policy Analysis (Chicago, IL: Aldine, 1973), pp. 277-295, at p. 280.
85. However, such explanations depict misrepresentation as deliberate, as well as politically and economically rational. If we now define a lie in the conventional fashion as making a statement intended to deceive others, we see that deliberate misrepresentation of costs and benefits is lying. If such lying is done for the public good (e.g., to save taxpayers' money), political theory would classify it in that special category of lying called the "noble lie," the lie motivated by altruism. According to expert on lying, Sissela Bok, this is the "most dangerous body of deceit of all." See S. Bok, Lying: Moral Choice in Public and Private Life (New York, NY: Vintage, 1979), pp. 14, 175;
86. L. Cliffe, M. Ramsey, and D. Bartlett, The Politics of Lying: Implications for Democracy (London: Macmillan, 2000), p. 3.
87. H. Priemus, B. Flyvbjerg, and B. van Wee, eds., (2003), op. cit.
88. R. Anguera, "The Channel Tunnel: An Ex Post Economic Evaluation," Transportation Research Part A, 40 (2006): 291-315.