Double whammy – how ICT projects are fooled by randomness and screwed by political intent

Budzier, Alexander and Flyvbjerg, Bent (2011) Double whammy – how ICT projects are fooled by randomness and screwed by political intent. Saïd Business School Working Paper, Oxford.

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The Iron Triangle formulates the holy trinity of objectives of project management – cost, schedule, and benefits. As our previous research has shown, ICT projects deviate from their initial cost estimate by more than 10% in 8 out of 10 cases. Academic research has argued that Optimism Bias and Black Swan Blindness cause forecasts to fall short of actual costs. Firstly, optimism bias has been linked to effects of deception and delusion, which is caused by taking the inside-view and ignoring distributional information when making decisions. Secondly, we argued before that Black Swan Blindness makes decision-makers ignore outlying events even if decisions and judgements are based on the outside view. Using a sample of 1,471 ICT projects with a total value of USD 241 billion – we answer the question: Can we show the different effects of Normal Performance, Delusion, and Deception?
We calculated the cumulative distribution function (CDF) of (actual-forecast)⁄forecast. Our results show that the CDF changes at two tipping points – the first one transforms an exponential function into a Gaussian bell curve. The second tipping point transforms the bell curve into a power law distribution with the power of 2.
We argue that these results show that project performance up to the first tipping point is politically motivated and project performance above the second tipping point indicates that project managers and decision-makers are fooled by random outliers, because they are blind to thick tails. We then show that Black Swan ICT projects are a significant source of uncertainty to an organisation and that management needs to be aware of.
Finally, we draw implications about the underlying generative processes that lead to power law behaviour, which might help to further understand the pitfalls and shortcomings of cost and cost risk management in ICT projects.

Item Type: Oxford Saïd Research Paper
Additional Information: Part of the Said Business School Working Paper Series; basis of the Harvard Business Review Article: Flvybjerg, B., Budzier, A. (2011) Why your IT Project May Be Riskier Than You Think, Harvard Business Review, September 2011.
Keywords: Risk; megaproject management; rare events; optimism bias; megaproject management
Subject(s): Project management
Date Deposited: 19 Aug 2011 11:19
Last Modified: 13 Nov 2018 12:08

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