Essays on behavioural economics and cost overuns

Abstract: This dissertation consists of five essays, four on cost overruns and one on behavioral economics witha focus on real estate investments. The main aim of the thesis was to answer the questions:• Is it common with cost overruns in infrastructure projects?• What explains the cost overruns?• What can be done to prevent cost overruns?This thesis contributes to the current state of knowledge within the field:• It is yet another evidence that cost overruns are a significant problem.• Optimism bias is an explanation of cost overruns. However, the thesis adds, by Article two, arationality explanation.• Dismisses in part the Successive method as a tool to reduce cost overruns.• Provide recommendations on how action against cost overruns can be systematized.The first article, which is a result of my Licentiate thesis deals with real estate investments and the fact that investors sometimes are influenced by behavioral aspects that make them deviate fromwhat is rational. The result is some what uncertain but shows that investors in these cases were influenced by myopic behaviour.The second article deals with cost overruns and rationality. The question is whether it can be rational in a procurement, using a unit?price contract, to expect cost overruns. The result shows that it is possible in situations where the decision maker has to take renegotiation costs and monitoring costs into account.The third article examines how well the successive method can pvents cost overruns. Established results in research on cost overruns indicated that strategic factors, psychological factors (optimism bias) and technical factors are important to explain cost overruns. The review suggests that the Successive method has limitations as a method to reduce cost overruns because it cannot deal with strategic and psychological factors.The fourth article focus on why cost overruns incurred. The article presents a new framework based on microeconomic cost theory and also results based on a survey to project managers in infrastructure projects, suggesting that cost overruns are common and that cost overrun mainly aredue to the optimism bias.The issue addressed in the fifth article is what can be done to prevent cost overruns. The conclusion, based on questionnaire survey and literature review, suggests that a variety of policy measures are needed at different levels such as (1): Organizational macrostructure where e.g. cost overruns in a project in one region leads to less projects in that region.(2) Organizational quality: improved transparency within organizations to see where and when cost overruns occur. (3) Organizational processes: e.g. the use of external reviewers.