The Outside View (Reference-Class Forecasting)

Minutes

Estimate how a plan, investment, or claim will turn out by first asking what happened to similar cases, rather than reasoning from the specifics of this one and the story you have been told about it.

How to do it

  1. 1Name the reference class: "people who invest through a stranger's trading platform", "kitchen renovations", "startups pitched at this stage", "multi-level marketing participants".
  2. 2Find the base rate for that class from a source that does not profit from your decision: regulator data, mandated disclosures, published studies, or a large sample of past cases.
  3. 3Write down the distribution (typical outcome, range, failure rate) before you think about what makes your case special.
  4. 4Only then adjust for specifics, and require evidence for each adjustment rather than a feeling that this time is different.
  5. 5If the pitch will not let you look at the reference class ("this is unlike anything else"), treat the refusal as data.

What to say

  • “What happens to most people who do this? Not the best case, the median case.”
  • “Before you tell me why this one is different, tell me what the usual outcome is.”

When to use it

  • •Evaluating a business opportunity, investment, franchise, or recruitment pitch.
  • •Planning a project with a budget or timeline you are tempted to believe.
  • •Hearing a testimonial-driven pitch where every example is a success.

Counters

Planning FallacyOptimism BiasSurvivorship BiasTestimonial EngineeringMLM Recruitment PitchPonzi DynamicsPump-and-Dump HypeHope PeddlingAnecdotal FallacyMisleading VividnessIllusion of ControlOverconfidence EffectPig-Butchering Scam

Evidence and how strong it is

Kahneman & Lovallo (1993) distinguished the "inside view" (reasoning from the case) from the "outside view" (reasoning from the class) and showed that the inside view systematically produces overoptimistic forecasts. Flyvbjerg (2006) turned this into reference-class forecasting for infrastructure projects, where it has been adopted in UK and Danish government appraisal guidance and reports large reductions in cost-overrun error. Consumer applications are direct: analyses of multi-level-marketing compensation disclosures (Taylor 2011, a consumer-advocate report hosted on the FTC website rather than a peer-reviewed study) find that the large majority of participants lose money, which is the relevant reference class for any individual pitch. Evidence strength: strong for the planning-fallacy mechanism and for project forecasting; the consumer use is a straightforward application.

Cautions
  • Choosing the reference class is itself a judgment, and a persuader will propose a flattering one ("early Amazon investors"). Choose the broadest class that shares the mechanism, not the outcome.
  • Base rates can be stale or from a different jurisdiction; note the source and date.
  • The outside view says what usually happens; it does not forbid exceptions. It sets the burden of proof the specifics must meet.
  1. Kahneman, D., & Lovallo, D. (1993). Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking. Management Science, 39(1), 17-31 · link
    The inside-view versus outside-view distinction and the argument that inside-view forecasts are systematically overoptimistic.
  2. Flyvbjerg, B. (2006). From Nobel Prize to Project Management: Getting Risks Right. Project Management Journal, 37(3), 5-15
    The reference-class forecasting method and its adoption in public-sector project appraisal.
  3. Taylor, J. M. (2011). The Case (for and) Against Multi-level Marketing. Consumer Awareness Institute; public comment hosted by the US Federal Trade Commission
    Analysis of MLM compensation disclosures finding that most participants lose money; cited as a consumer-advocate report, not peer-reviewed research.
Last reviewed

More in Personal decisions

Name the Tactic

Saying out loud (or to yourself) which persuasion technique is being used on you activates persuasion knowledge and turns an automatic response into a deliberate one.

The Pause (24-Hour Rule)

A standing personal policy never to make a significant purchase, transfer, signature, or commitment in the same sitting in which it is proposed, so that urgency-based tactics expire before you act.

Consider the Opposite

Deliberately generate the reasons your current judgment might be wrong before acting on it, which measurably reduces confirmation-driven error in a way that merely trying to be fair does not.

Decide Before You Look (Pre-commitment)

Fix your criteria, budget, walk-away point, or answer in writing before you see the offer, the anchor, or the pressure, so that the decision is made by the cool version of you.

10/10/10

Ask how you will feel about this choice in ten minutes, ten months, and ten years, which pulls the decision out of the present emotional state that a persuader is working on.

HALT Check (Hungry, Angry, Lonely, Tired)

Before responding to a persuasive request, check whether you are hungry, angry, lonely, or tired, because each of those states is a known lever for manipulation and a reason to defer.