Applicability of reference based appraisals in assessment of real sector investment projects
Applicability of reference based appraisals in assessment of real sector investment projects

Summary/Abstract: Assessment of investment projects in real sector often produces erroneous results. This could be attributed to two major causes: optimism bias and strategic misconception. It is possible to improve appraisals by adoption of external view in project assessment. On the ground of theoretical foundation provided by works of D. Kahneman and A. Tversky, new appraisal procedure based on reference forecasting could be formulated. The proposal calls for a three-stage approach: firstly relevant reference class of similar past projects has to be constructed, then variables subjected to appraisal in particular project need to be calculated across all projects in the established reference class. Finally a mechanism for correcting individual project appraisal results using acquired reference values should be employed. In this paper the method for establishing reference classes and problem of calculation of average values within reference class is discussed taking into consideration both qualitative and quantitative methods. Examples illustrating the application of both methods are provided based either on British proposal for dealing with optimism bias or author’s own research into building qualitative reference framework. Finally barriers and limitations in applicability of reference based appraisal in real sector are discussed.

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