  Most cost-benefit analyses assume that the estimates of costs and benefits
are more or less accurate and unbiased. But what if, in reality, estimates are
highly inaccurate and biased? Then the assumption that cost-benefit analysis is
a rational way to improve resource allocation would be a fallacy. Based on the
largest dataset of its kind, we test the assumption that cost and benefit
estimates of public investments are accurate and unbiased. We find this is not
the case with overwhelming statistical significance. We document the extent of
cost overruns, benefit shortfalls, and forecasting bias in public investments.
We further assess whether such inaccuracies seriously distort effective
resource allocation, which is found to be the case. We explain our findings in
behavioral terms and explore their policy implications. Finally, we conclude
that cost-benefit analysis of public investments stands in need of reform and
we outline four steps to such reform.
