5.43 Optimism bias is the demonstrated systematic tendency for appraisers to be over-optimistic about key project parameters, including capital costs, operating costs, project duration and benefits delivery. Over-optimistic estimates can lock in undeliverable targets.
5.44 To reduce this tendency appraisals should make explicit adjustment for optimism bias. The Green Book recommends applying overall percentage adjustments at the outset of an appraisal. The initial optimism bias estimate should not be "locked in" but can be reduced as an appraisal develops and the cost of specific risks are identified.
5.45 Ideally adjustments should be based on an organisation's own evidence base for historic levels of optimism bias. In the absence of robust organisation-specific estimates generic values are provided in Annex 5. There are currently no generic values available to be applied to benefits, however an adjustment should be applied based on an organisation's own evidence base.11
5.46 Optimism bias is a form of reference class forecasting which predicts future outcomes based on the outcomes for a group of similar past projects. It is important to note that adjustments for optimism bias are not the same as financial contingency (a concept explained above).
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11 An example of adjusting benefits for optimism bias at a local level can be found in Supporting public service transformation: cost benefit analysis for local partnerships.