Cost Projections Consistenly Inflated by US Government

A Strategy+Business article on the myth of cost-benefit analysis reveals how the government has consistently gotten cost estimates wrong:

A February 2004 analysis by Ruth Ruttenberg & Associates for the Public Citizen Foundation concluded that in 30 years of federal regulatory activity, the U.S. government had consistently inflated cost estimates for health, safety, and environmental protections. Rarely, if ever, did actual compliance costs reach the estimates provided by the regulating agency – and costs never reached the levels estimated by the private sector.

I think it’s interesting that the private sector “got it wrong” more than the government. The reason appears to be from process-embedded value judgements made during the process:

“[their] practical application…involves a significant number of controversial value judgments…that have become embedded in the practice of economics as we know it,” wrote Tyler Cowen, an economist at George Mason University and at the Center for Study of Public Choice, in 1998.

They conclude that there is a gap between numbers and judgement- meaning that numbers and judgement tend to not be considered together mainly because one is quantitative and the other is qualitative. Worse yet, those crunching the numbers tend to NOT want any qualitative judgement that might invalidate the numbers. This insularity causes poor judgements, without required information, and bad decisions.

Do you have an example of a terrible decision in your business? Was a cost-benefit analysis that did not consider non-qualitative, judgemental criteria the cause? Share your insights and experiences!

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