The ambiguous nature of forecasts in project evaluation: Diagnosing the over-optimism of rate-of-return analysis

Development projects often have low economic rates of return, despite high ex ante forecasts. By reviewing several sets of project appraisals undertaken by the World Bank, this paper isolates the technical/methodological sources of this bias. There are several types of failures to account for the fact that unforeseen conditions are more likely to reduce rather than enhance the true rate of return, but the ambiguity in the status of ‘predictions’ in project evaluation allows unreasonably conditional, optimistic forecasts to be used where usually more pessimistic absolute forecasts would be appropriate.