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Reference classforecasting,or comparison class forecasting, is the method of

predicting the future, through looking at similar past situations and their outcomes.

Reference class forecasting predicts the outcome of a planned action based on actual

outcomes in a reference class of similar actions to that being forecast. The theoriesbehind reference class forecasting were developed byDaniel KahnemanandAmos

Tversky.The theoretical work helped Kahneman win theNobel Prize in Economics.

Kahneman and Tversky[1][2]found that human judgment is generally optimistic due to

overconfidence and insufficient consideration of distributional information about

outcomes. Therefore, people tend to underestimate the costs, completion times, and

risks of planned actions, whereas they tend to overestimate the benefits of those same

actions. 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.

Kahneman and Tversky concluded that disregard of distributional information, that is,

risk, is perhaps the major source of error in forecasting. On that basis they recommended

that forecasters "should therefore make every effort to frame the forecasting problem so

as to facilitate utilizing all the distributional information that is available".[2]:316Using

distributional information from previous ventures similar to the one being forecast is

called taking an "outside view". Reference class forecasting is a method for taking an

outside view on planned actions.

Reference class forecasting for a specific project involves the following three steps:

1. Identify a reference class of past, similar projects.

2.

Establish aprobability distributionfor the selected reference class for

theparameterthat is being forecast.

3. Compare the specific project with the reference class distribution, in order to

establish the most likely outcome for the specific project.

Whereas Kahneman and Tversky developed the theories of reference class

forecasting,FlyvbjergandCOWI(2004) developed the method for its practical use inpolicy and planning. The first instance of reference class forecasting in practice is

described in Flyvbjerg (2006).[3]This was a forecast carried out in 2004 by the UK

government of the projected capital costs for an extension ofEdinburgh Trams.The

promoter's forecast estimated a cost of 255 million. Taking all available distributional

information into account, based on a reference class of comparable rail projects, the

reference class forecast estimated a cost of 320 million. A report issued in August 2011

estimated that the final cost of the yet unfinished project would be over 1 billion, for a

shorter tram line than the proposed Line 2.[4]

Since the Edinburgh forecast, reference class forecasting has been applied to numerous

other projects in the UK, including the 15 (US$29) billionCrossrailproject in London.

http://en.wikipedia.org/wiki/Forecastinghttp://en.wikipedia.org/wiki/Forecastinghttp://en.wikipedia.org/wiki/Forecastinghttp://en.wikipedia.org/wiki/Daniel_Kahnemanhttp://en.wikipedia.org/wiki/Daniel_Kahnemanhttp://en.wikipedia.org/wiki/Daniel_Kahnemanhttp://en.wikipedia.org/wiki/Amos_Tverskyhttp://en.wikipedia.org/wiki/Amos_Tverskyhttp://en.wikipedia.org/wiki/Amos_Tverskyhttp://en.wikipedia.org/wiki/Amos_Tverskyhttp://en.wikipedia.org/wiki/Nobel_Prize_in_Economicshttp://en.wikipedia.org/wiki/Nobel_Prize_in_Economicshttp://en.wikipedia.org/wiki/Nobel_Prize_in_Economicshttp://en.wikipedia.org/wiki/Reference_class_forecasting#cite_note-Kahneman_and_Tversky_1979a-1http://en.wikipedia.org/wiki/Reference_class_forecasting#cite_note-Kahneman_and_Tversky_1979a-1http://en.wikipedia.org/wiki/Reference_class_forecasting#cite_note-Kahneman_and_Tversky_1979a-1http://en.wikipedia.org/wiki/Reference_class_forecasting#cite_note-Kahneman_and_Tversky_1979b-2http://en.wikipedia.org/wiki/Reference_class_forecasting#cite_note-Kahneman_and_Tversky_1979b-2http://en.wikipedia.org/wiki/Reference_class_forecasting#cite_note-Kahneman_and_Tversky_1979b-2http://en.wikipedia.org/wiki/Probability_distributionhttp://en.wikipedia.org/wiki/Probability_distributionhttp://en.wikipedia.org/wiki/Probability_distributionhttp://en.wikipedia.org/wiki/Parameterhttp://en.wikipedia.org/wiki/Parameterhttp://en.wikipedia.org/wiki/Parameterhttp://en.wikipedia.org/wiki/Flyvbjerghttp://en.wikipedia.org/wiki/Flyvbjerghttp://en.wikipedia.org/wiki/Flyvbjerghttp://en.wikipedia.org/wiki/COWIhttp://en.wikipedia.org/wiki/COWIhttp://en.wikipedia.org/wiki/COWIhttp://en.wikipedia.org/wiki/Reference_class_forecasting#cite_note-Bent_Flyvbjerg-3http://en.wikipedia.org/wiki/Reference_class_forecasting#cite_note-Bent_Flyvbjerg-3http://en.wikipedia.org/wiki/Reference_class_forecasting#cite_note-Bent_Flyvbjerg-3http://en.wikipedia.org/wiki/Edinburgh_Tramshttp://en.wikipedia.org/wiki/Edinburgh_Tramshttp://en.wikipedia.org/wiki/Edinburgh_Tramshttp://en.wikipedia.org/wiki/Reference_class_forecasting#cite_note-bbc-loan-4http://en.wikipedia.org/wiki/Reference_class_forecasting#cite_note-bbc-loan-4http://en.wikipedia.org/wiki/Reference_class_forecasting#cite_note-bbc-loan-4http://en.wikipedia.org/wiki/Crossrailhttp://en.wikipedia.org/wiki/Crossrailhttp://en.wikipedia.org/wiki/Crossrailhttp://en.wikipedia.org/wiki/Crossrailhttp://en.wikipedia.org/wiki/Reference_class_forecasting#cite_note-bbc-loan-4http://en.wikipedia.org/wiki/Edinburgh_Tramshttp://en.wikipedia.org/wiki/Reference_class_forecasting#cite_note-Bent_Flyvbjerg-3http://en.wikipedia.org/wiki/COWIhttp://en.wikipedia.org/wiki/Flyvbjerghttp://en.wikipedia.org/wiki/Parameterhttp://en.wikipedia.org/wiki/Probability_distributionhttp://en.wikipedia.org/wiki/Reference_class_forecasting#cite_note-Kahneman_and_Tversky_1979b-2http://en.wikipedia.org/wiki/Reference_class_forecasting#cite_note-Kahneman_and_Tversky_1979a-1http://en.wikipedia.org/wiki/Reference_class_forecasting#cite_note-Kahneman_and_Tversky_1979a-1http://en.wikipedia.org/wiki/Nobel_Prize_in_Economicshttp://en.wikipedia.org/wiki/Amos_Tverskyhttp://en.wikipedia.org/wiki/Amos_Tverskyhttp://en.wikipedia.org/wiki/Daniel_Kahnemanhttp://en.wikipedia.org/wiki/Forecasting

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After 2004, The Netherlands, Denmark, and Switzerland have also implemented various

types of reference class forecasting.

Before this, in 2001 (updated in 2006),AACE International(the Association for the

Advancement of Cost Engineering) included Estimate Validation as a distinct step in the

recommended practice of Cost Estimating (Estimate Validation is equivalent to

Reference class forecasting in that it calls for separate empirical-based evaluations to

benchmark the base estimate):

The estimate should be benchmarked or validated against or compared to historical

experience and/or past estimates of the enterprise and of competitive enterprises to

check its appropriateness, competitiveness, and to identify improvement

opportunities...Validation examines the estimate from a different perspective and using

different metrics than are used in estimate preparation.[5]

In the process industries (e.g., oil and gas, chemicals, mining, energy, etc. which tend to

dominate AACE's membership), benchmarking (i.e., "outside view") of project cost

estimates against the historical costs of completed projects of similar types, including

probabilistic information, has a long history

http://en.wikipedia.org/wiki/AACE_Internationalhttp://en.wikipedia.org/wiki/AACE_Internationalhttp://en.wikipedia.org/wiki/AACE_Internationalhttp://en.wikipedia.org/wiki/Reference_class_forecasting#cite_note-5http://en.wikipedia.org/wiki/Reference_class_forecasting#cite_note-5http://en.wikipedia.org/wiki/Reference_class_forecasting#cite_note-5http://en.wikipedia.org/wiki/Reference_class_forecasting#cite_note-5http://en.wikipedia.org/wiki/AACE_International