Have You Fallen Victim to the Planning Fallacy?

The latter half of 2013 was a tough time for public programs.

The difficulties surrounding the launch of healthcare.gov have been well documented. And in November, a fatal construction accident at the site of the future World Cup venue in São Paolo confirmed suspicions that Brazil would not make many of its FIFA-mandated December 31 completion deadlines. Indeed, by December, half of the twelve venues were behind schedule and over budget. Three of the sites have no realistic chance of completion until a few nerve-racking months before opening day.

There has been no shortage of blame and finger pointing in both cases, but the reality is that only the planners – and their auditors – know the true source of the problem.

Nevertheless, these cases do present a golden opportunity to speak broadly about project planning, as well as the perils of improper preparation.

In his bestselling book, “Thinking, Fast and Slow,” psychologist and behavioral economist Daniel Kahneman describes a behavioral phenomenon known as the “planning fallacy,” or the tendency to make plans that are overly optimistic or that vastly underestimate the requirements for successful completion. This can lead to formulating what seem like realistic plans, but in actuality resembles a best-case scenario. Susceptibility to the planning fallacy is especially prevalent when a focus on the perceived benefits, such as hosting a prestigious global event, can lead one to underestimate associated costs.

The bad news is that Kahneman was able to find a seemingly endless supply of victims to the planning fallacy. For example, a 2002 survey of homeowners in the U.S. found the average cost of remodeling their kitchens cost $38,769. The expected cost was $18,658.

Fortunately, there is good news as well. According to Kahneman, there is a very simple strategy to mitigate the planning fallacy.

Take the Outside View

When we make unrealistic plans, it is usually because we are taking what Kahneman calls the “inside view.” In other words, we are making our estimates based on the individual characteristics of the project in isolation, which exposes the plan to optimism bias. Instead, to more accurately estimate time and cost, planners should take the “outside view” – gathering as much historical data as possible from similar project plans and outcomes.

This method has been refined as “reference class forecasting” by Danish program management scholar Bent Flyvbjerg. The steps include:

1. Identify a relevant reference class of past projects (such as the launch of a large, public website or the building of a soccer stadium). According to Flyvbjerg, the sample must be large enough to be statistically meaningful, but narrow enough so that the parameters closely match your planned project.

2. Obtain the information and employ it to generate meaningful statistical conclusions about the data. Use them as a baseline for your predictions.

3. Compare your specific project to this baseline, taking any individual characteristics of your project into consideration, and adjust your predictions accordingly.

If this seems simple, it is. But unfortunately the research reveals that this valuable step is overlooked on even some of the largest projects. You can avoid the planning fallacy by grounding your project in real world data and save yourself from a world of pain and disappointment on the other side.

For Flyvbjerg’s complete article on reference class forecasting, click here.