Optimism bias, sensitivity analysis and switching values

Try 3 questions on this

Pick an answer to see why each option is right or wrong.

1. Early in appraising a predictive project, the project manager raised the cost and duration estimates to correct for optimism bias. The team has since funded measures that remove several specific risks. Which of the following should the project manager do with that adjustment?

   Right. In the game that’s Renown for your Business Environment building.

   Not that one: D is right. In the game your Business Environment building would lose a little Renown, and this question would come back later.

   Your answerA.Keep the full adjustment in placeKeeping a margin feels prudent, but the Green Book says the optimism bias adjustment is reduced in proportion to the level of risk prevented.Your answerB.Add the measures' cost to itThe Green Book puts prevention costs in the proposal's core costs, not inside the optimism bias adjustment.Your answerC.Remove it now risks are handledSeveral risks are handled, not all of them. The adjustment shrinks in proportion to the risk prevented, it does not vanish.The answerD.Reduce it by the risk removedThe Green Book says optimism bias is corrected by explicit adjustments at the outset of an appraisal. As specific risks are estimated in more detail and prevention costs are incorporated, practitioners should then reduce the optimism bias adjustment in proportion to the level of risk prevented.

   Show the full explanation and doc quotes

   Neither keeping it whole nor dropping it matches that rule.

   Written from www.gov.uk/government/publications/the-green-book--2/the-green-book-2026

2. The project manager is drafting the cost forecasts for a new public infrastructure proposal. Past proposals of this kind have consistently underestimated their final costs. Which of the following should the project manager do?

   Right. In the game that’s Renown for your Business Environment building.

   Not that one: D is right. In the game your Business Environment building would lose a little Renown, and this question would come back later.

   Your answerA.Use the sponsor's target budgetThe sponsor's target says what the organization hopes to spend, not what similar proposals have cost in practice.Your answerB.Rely on the team's bottom-up estimateBottom-up estimating is the approach that has already produced underestimates; on its own it does not correct the known bias.Your answerC.Request a larger management reservePadding the reserve guesses at the problem. The Green Book derives the adjustment from historical forecast errors in similar interventions.The answerD.Use evaluations of similar projectsThe Green Book says appraisals should be informed by evaluation evidence from the previous history of the intervention or similar interventions.

   Show the full explanation and doc quotes

   In particular, data from previous interventions is used to identify historical forecast errors and derive appropriate optimism bias adjustments.

   Written from www.gov.uk/government/publications/the-green-book--2/the-green-book-2026

3. The project manager is about to present the shortlist appraisal. The preferred option's value rests on several uncertain assumptions about demand and input prices, and only central estimates have been calculated. Which of the following should the project manager do?

   Right. In the game that’s Renown for your Business Environment building.

   Not that one: B is right. In the game your Business Environment building would lose a little Renown, and this question would come back later.

   Your answerA.Add a larger contingency allowanceMore contingency covers residual risk; it does not show decision makers how sensitive the preferred option is to its assumptions.The answerB.Add sensitivity analysis and switching valuesThe Green Book says sensitivity analysis tests how changes in key assumptions might affect a proposal's results, and a switching value is how far a key variable would need to change for an option to stop being value for money.Your answerC.Present the central estimates unchangedCentral estimates alone do not show how the result changes if assumptions turn out differently.Your answerD.Raise all costs by a marginA flat margin hides which assumptions drive the result and how far they can move.

   Show the full explanation and doc quotes

   At a minimum both should be done for the preferred option and included in the shortlist results.

   Written from www.gov.uk/government/publications/the-green-book--2/the-green-book-2026