The planning fallacy is the most common cause of costly forecasting errors. Employ the outside view technique to minimize the negative effects of the planning fallacy and improve forecasting.
- It does not do to leave a live dragon out of your calculations if you live near one. That's great planning advice from J.R.R. Tolkien. But the truth is revealed by Taylor Swift, who wisely warned, "Just because you made a plan doesn't mean that's what's going to happen." Our tendency to underestimate the amount of time a project will take is one of our most common fallacies, or failures of reasoning. It's the planning fallacy. It's a major cause of forecasting errors, and it's very expensive. You'll use critical thinking to avoid the planning fallacy. We'll get to that in a minute. This fallacy is due to two things. Number one, we're overly optimistic when it comes to forecasting how long things will take. We fail to consider external factors, like an economic crisis disrupting our project, and internal factors, like our team getting sick. Plus, success is easier to imagine than failure, even though there's often one correct outcome yet countless ways for our plan to go awry. Number two, we fail to consider the data from similar cases. We think our situations are unique. To avoid the planning fallacy, use the outside view. This is different from the most common way we plan, which is to use the inside view. Gathering information, finding out how long each contributor thinks their part will take, adding our own intelligence and projecting out. The outside view looks at similar situations, to create a reference class for providing a statistical basis for your plan. This means using data on how long comparable projects took, and adjusting your overly optimistic projections accordingly. You'll use critical thinking, setting aside intuition, not attributing uniqueness to your plan, and discounting anecdotal evidence. It's the most accurate way to forecast. To take the outside view, ask and answer this question. When others were in this situation, what happened? Number one, identify a reference class for what you're planning. If you're planning a major software upgrade, or building remodel, product launch, or grand opening, your reference class comes from past software upgrade projects, remodels, launches, or grand openings. Our situations are not unique. Focus on what's the same, not on what's different, and you'll find your useful reference class. Number two, obtain statistics from the reference class. Look for histories of plan versus actual. Expenditures over budget. Actual time versus plan. Average outcome, most common outcome. Cost of resources, percentage of successes and failures. And be sure to note extreme successes or failures that could overly influence your forecast. Number three, make a prediction, or adjust your plan. Use your reference class data to create your plan, and if you had created a plan using the inside view, then use your outside view to estimate your chances of success and failure, and adjust accordingly. And here's your pro tip. The Green Book is a U.K. government tool that provides project data. You might find your reference class stats there. Use the outside view to overcome the planning fallacy and sharpen your forecasts. I'll be curious to hear how it works for you.
- Comparing critical and strategic thinking
- Minimizing bad judgements
- Recognizing cognitive bias
- Using counterfactual thinking
- Overcoming loss aversion
- Avoiding logical fallacies
- Creating a culture of critical thinking