The Planning Fallacy
Behavioral New World
The planning fallacy
September 1, 2021
Today I want to talk about one of my favorite fallacies: the planning fallacy. This phenomenon is the tendency for us humans to underestimate the time it will take to complete a project, or just about any task (and the accompanying cost overruns). Most of you have experienced this phenomenon at least once in your life, probably many times.
The quintessential example is that of building a new house. Stories abound from around the world, and over the centuries, of overruns of time, money, and patience. But for the moment let’s look at data from the U.S. Census Bureau, which show that in 2019 construction of a single-family home on average took about seven months. However, this figure did not include the time for an architect to draw up plans or the time required to get a building permit. Or the years you talked about it with your spouse ahead of time.
So, based on this Census data, it is reasonable to conclude that from first commitment (“let’s do it”) to completion (at frickin’ last!) can easily be a year, if not well beyond. But who wants to wait a year? You and your peers would concur that it is understandable to “plan” on, say, six months.
The planning fallacy is not limited to building houses—it can apply to every aspect of our lives: working on a term paper with a deadline; doing household chores; or estimating driving times.
Further examples abound. The United Kingdom is in the midst of building what it calls “High Speed Rail 2,” a kind of bullet train between London and major cities to the north. The original budget in 2012 for the 20-year project was $54 billion; today, after several years of construction, the estimate is running close to $150 billion (and behind schedule).
And an even more extreme one, in terms of raw miscalculation, was the cost of building the iconic Sydney Opera House. The original estimate was $7 million; by the time it was finished in 1973, the cost reached $102 million.
The planning fallacy was first described in 1979 by Amos Tversky and Daniel Kahneman, who through their brilliant work effectively founded the area of academic research now known as “behavioral economics.” Hence study of this fallacy has been around quite a while now. The question is: Why does it persist?
Merely possessing awareness about it is not enough to significantly diminish its potency. Several reasons for its persistence come to mind. If it is a project that involves a desired outcome (for example, a new house) we want it sooner rather than later. If it is a project that is undesirable (for me, cleaning out the gutters of my house), we want it over quickly.
Also, people have an optimism bias, particularly when it comes to their own abilities. Given this optimism, we tend to filter out information that suggests we are mistaken (see my May 2020 newsletter on confirmation bias). Within an organization, there may be pressure to complete a project quickly, so the initial estimates get pared down to please the boss.
But perhaps most importantly, in recent decades – here in the United States at least – the notion that what you think actually determines what happens in life has taken a strong foothold. Probably the best example of this is the 2006 best-selling book The Secret by Rhonda Byrne. It posits that envisioning outcomes – such as your new house being completed within six months – will make it so. This “magical thinking” is typical of those suffering from – or blessed with, from some people’s viewpoint – optimism bias.
Personal note: I believe, along with many people, that it is difficult in life to achieve goals large or small without a good dose of optimism. But when that optimism careens into the world of magic, please be cautious. Investors in Enron, or Bernie Madoff’s funds, will know what I mean.
So what can we do to offset the planning fallacy? Interestingly, when outsiders are asked to predict completion times, they tend to overestimate them.[1] Thus, one approach is to ask a disinterested party to make estimates and perhaps take an average of the “inside” and “outside” estimates. Alternatively, a team (or household) can conduct a pre-mortem, which is one of Kahneman’s favorite tricks. As the name suggests, a pre-mortem involves this thought experiment: Imagine it is some future time and the project has run over time (and probably cost—the two go together). What went wrong? Some of the answers to that question will suggest that the time estimate is optimistic. (“Oh, we forgot that getting lumber from Canada is taking longer these days.”)
I suggest having a Planning Fallacy Committee engaged in planning process right from the beginning. And don’t underestimate how long the planning will take!
[1] Buehler, Roger; Dale Griffin; Michael Ross (1995). "It's about time: Optimistic predictions in work and love". European Review of Social Psychology. 6: 1–32.