The OTR GroupMost project plans are written by hopeful people. That is not a criticism; it is human nature, and it is also something the UK government's appraisal guidance addresses directly. This explainer looks at what HM Treasury's Green Book says about optimism bias. It is general information, so check the current Green Book for your own work.
What is optimism bias?
The Green Book defines optimism bias as "the proven tendency for appraisals to be over-optimistic about key assumptions." In other words, forecasts of what a proposal will cost, how long it will take and what it will deliver have a track record of being rosier than reality.
What does the Green Book ask people to do?
The wording is direct: practitioners should explicitly adjust their appraisals for optimism bias. The direction of the adjustment is also clear. Estimates of social costs and project durations go up, and estimates of social benefits go down. The word "explicitly" matters, because the adjustment is meant to be visible in the appraisal rather than buried in a general feeling of caution.
Where does it fit in an appraisal?
In the Green Book's shortlist appraisal steps, the adjustment for optimism bias comes after monetisable costs and benefits have been adjusted for inflation and discounting, and before the summary measures are calculated. Those measures include net present social value and the benefit cost ratio for cost-benefit analysis. So the adjustment shapes the headline numbers that decision makers see.
Who has to follow it?
The Green Book is mandatory for UK government departments and arm's length bodies when they develop proposals involving significant public spending. Many other organisations use it as a model of good practice, even where it is not required.
Why does it matter for project teams?
For anyone who builds business cases, optimism bias is a reminder that the first set of numbers is rarely the final set. If the budget, schedule and benefits all look comfortable, that is exactly when it is worth asking what evidence sits behind them.
Practical habits that help
These are our suggestions rather than Green Book requirements, but they fit its spirit:
- Write down the assumptions behind each cost, duration and benefit figure, and say who will check them.
- Compare your estimates with what similar work actually cost and how long it actually took, where you have that information.
- Show the adjusted and unadjusted figures side by side, so readers can see what the adjustment did.
- Revisit the estimates at each decision point, and record what has changed since the last one.
What this article does not cover
The Green Book's supplementary guidance on optimism bias, and individual departments' own guidance, may give more detail on how large an adjustment should be. We have not covered figures here. If you are preparing a government business case, read the current guidance on GOV.UK and follow your organisation's own requirements.
The short version
Optimism bias is well documented, the Green Book says to adjust for it explicitly, and the adjustment pushes costs and durations up and benefits down. Treat your first estimate as a starting point, not a promise.