Kahneman and Tversky[1][2] found that human judgment is generally optimistic due to overconfidence and insufficient consideration of distributional information about outcomes.
Such error is caused by actors taking an "inside view", where focus is on the constituents of the specific planned action instead of on the actual outcomes of similar ventures that have already been completed.
[6] This forecast was part of a review of the Edinburgh Tram Line 2 business case, which was carried out in October 2004 by Ove Arup and Partners Scotland.
Using the newly implemented reference class forecasting guidelines, Ove Arup and Partners Scotland calculated the 80th percentile value (i.e., 80% likelihood of staying within budget) for total capital costs to be £400 million, which equaled 57% contingency.
The review further acknowledged that the reference class forecasts were likely to be too low because the guidelines recommended that the uplifts should be applied at the time of decision to build, which the project had not yet reached, and that the risks therefore would be substantially higher at this early business case stage.
[9] A method combining reference class forecasting and competitive crowdsourcing, Human Forest, has also been used in the life sciences, to estimate the likelihood that vaccines and treatments will successfully progress through clinical trial phases.