Topic 5: CBA: Discounting, Optimism Bias and Risk

Question 1

What are the two main approaches to estimating the social discount rate?

Answer 1

Question 2

What is the Green books approach to calculating the discount rate?

Answer 2

Question 3

How does the UK’s discount rate vary over time? Why does it do this?

Answer 3

Question 4

What exceptions are there to the 3.5% UK SDR?

Answer 4

Exceptions to 3.5% rate:
* Health - 1.5%
* Official Development Assistance (ODA) often 10%
* Projects with large intergenerational impacts e.g., irreversible changes to the natural environment

Question 5

What is the Stern critique of discount rates? What does he propose?

Answer 5

Question 6

How can the dicsount rate be altered to include a risk premium

Answer 6

Question 7

What are the 4 alternatives to the social discount rate?

Answer 7

Question 8

What are the three types of knowns?

Answer 8

Question 9

What are the 6 methods for tackling uncertainty?

Answer 9

Question 10

What is optimism bias?

Answer 10

Question 11

Flyvbjerg and Bester (2021) did a meta analysis of how costs and benefits were over and underestimated. What did they find?

Answer 11

Question 12

Give examples of the optimism bias in different DfT projects

Answer 12

Question 13

What is a quantified risk assessment and what is the four step process for approach a QRA?

Answer 13

Question 14

How can you use a probability distribution to estimate risk of a project running over budget?

Answer 14

Question 15

Describe optimism bias, risk and sensitivity analysis

Answer 15

Question 16

How should we treat sunk costs?

Answer 16