PsychologicalDUAL-USE

Planning Fallacy

What it is

The systematic tendency to underestimate the time, cost, and risk of a project while overestimating its benefits — even by people who know that their past projects overran.

How it works

Kahneman and Tversky coined the term in 1979 to describe forecasters who take the inside view — building a plan from the specific steps they can imagine — rather than the outside view of how similar projects actually turned out. Buehler, Griffin and Ross (1994) asked students to estimate when they would finish their theses: the average estimate was about 34 days and the average reality about 55, and fewer than half finished by the date they had called 99 percent certain. The mechanism is that a plan is a story of success; the ways things go wrong are numerous, individually unlikely, and not in the story. Bent Flyvbjerg's study of 258 transport projects found cost overruns in nine out of ten, and he argues that beyond honest optimism there is strategic misrepresentation — bidders and sponsors who lowball deliberately because the low estimate wins the approval. That is the exploitation: once a project is under way, sunk cost and commitment carry it past the number that would have killed it at the start.

Real-world examples

  • •The Sydney Opera House was estimated in 1957 at about seven million Australian dollars for completion in 1963; it opened in 1973 at roughly one hundred million.
  • •Buehler, Griffin and Ross (1994): honors students predicted thesis completion in about 34 days on average and took about 55; predictions made with 99 percent confidence were met less than half the time.
  • •Flyvbjerg, Holm and Buhl (2002) found average cost overruns of roughly 28 percent across 258 rail, bridge, tunnel, and road projects on several continents, with no improvement over seventy years — the signature of a systematic bias rather than bad luck.
  • •Timeshare and vacation-club sales invite prospects to a “90-minute presentation” that is designed to run for hours; the low time estimate is what gets people in the room.
  • •Software vendors and consultancies quote the happy-path implementation time; the change orders that follow are more profitable than the original contract.

Ethical guidelines

Where the line is

An honest estimate that turns out low is an error, not a manipulation; the line is crossed when a forecaster knowingly presents a best-case number as the expected one, or withholds the reference-class data, in order to win an approval that an accurate estimate would have lost.

  • ●Estimate from the reference class — what similar projects actually cost and took — and show the audience that data, not only your plan.
  • ●A low estimate given to win approval, with the expectation of raising it once the project is committed, is deception regardless of how common it is in your industry.
  • ●State confidence intervals honestly; a single-point estimate for an uncertain project misrepresents what you know.
  • ●Once a project overruns, present the decision to continue as a fresh decision on remaining costs and benefits, not as fidelity to the original number.

How to defend against it

  • ►Use reference-class forecasting: find the distribution of outcomes for similar projects and place your estimate in it before trusting any bottom-up plan.
  • ►Ask the estimator for their track record on comparable jobs and for the largest overrun they have had; adjust by that ratio.
  • ►Unpack the plan into its steps and ask what happens if each one slips; then add the slips, because they do not cancel out.
  • ►Put the estimate in the contract: fixed price, penalty clauses, or milestone payments shift the cost of the fallacy to the party making the forecast.
  • ►When a project has overrun, decide about the future on remaining cost and remaining value alone; the money already spent is not an argument.

From the Defense Playbook

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.

Premortemminutes

Before committing, imagine the decision has already failed a year from now and write the story of how it failed, which surfaces risks that ordinary "what could go wrong?" discussion suppresses.

Calendar the Cancel Dateseconds

At the moment you start any trial, introductory rate, or auto-renewing contract, put a reminder in your calendar a few days before it renews, with the cancellation link and the price it will jump to, because the business model counts on you forgetting.

"Which Step, Specifically?"minutes

When told that one action will lead through a chain of events to a dramatic outcome, lay the chain out link by link, ask what makes each link likely, and remember that the probability of the whole chain is lower than that of its weakest link.

Red-Team Your Campaigntakes practice

Before launch, give people who did not build the campaign the explicit job of attacking it as a skeptical journalist, a regulator, a competitor, a harmed customer, and a bad actor would, and fix what they find while it is still cheap to fix.

Every playbook entry states how strong its evidence is and when not to use it. Browse the full playbook.

References

  1. Kahneman, D., & Tversky, A. (1979). Intuitive prediction: Biases and corrective procedures. TIMS Studies in Management Science, 12, 313-327
    Coinage of the planning fallacy and the inside-view versus outside-view distinction.
  2. Buehler, R., Griffin, D., & Ross, M. (1994). Exploring the “planning fallacy”: Why people underestimate their task completion times. Journal of Personality and Social Psychology, 67(3), 366-381 · link
    The thesis-completion studies and the finding that people ignore their own past overruns.
  3. Flyvbjerg, B., Holm, M. S., & Buhl, S. (2002). Underestimating costs in public works projects: Error or lie?. Journal of the American Planning Association, 68(3), 279-295 · link
    The 258-project dataset, the roughly 28 percent average overrun, and the strategic-misrepresentation argument.
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