As you know, cash flow estimation is the most critical and most difficult part of the capital investment analysis process. Cash flows often must be forecasted many years into the future, and estimation errors (some of which can be large) are bound to occur. However, as long as cash flow estimates are unbiased and the errors are random, they will tend to offset one another from project to project and, when many projects are considered, realized aggregate profitability will be close to that expected.

However, some managers tend to overstate revenues and understate costs on most projects, which results in an upward bias in estimated profitability. If this occurs, more projects will be accepted than would be if no bias existed. Several potential reasons may explain cash flow estimation bias. Perhaps managers have an incentive to maximize department size rather than profitability. Or managers may become emotionally attached to their project proposals and are unable to make objective estimates. (Taken from For Your Consideration on page 298 in your text)

Do you think that cash flow estimation bias exists in health services organizations? If so, why might that be the case? What steps could senior management take to eliminate the bias?