Unanticipated Futures: Some Common Planning Fallacies

What is it?

There are four common planning fallacies:

The Hofstadter Law states that "[Things] always takes longer than you expect, even when you take into account Hofstadter's Law." 1

Economist Albert Hirschman's Hiding Hand Principle states that people are "apt to take on and plunge into new tasks because of the erroneously presumed absence of a challenge—because the task looks easier and more manageable than it will turn out to be." 2

The Kahneman & Tversky Planning Fallacy states that "[n]o matter how detailed, the business scenarios used in planning are generally inadequate" and tend to understate costs and overstate benefits. Additionally, they "also tend to exaggerate the degree of control we have over events, discounting the role of luck." 3

Parkinson's Law is the adage that "work expands so as to fill the time available for its completion". 4

Why

Planing fallacies suggest that projects will generally take longer and be harder than expected, even when the expectations are that they will take a long time.

Planning Fallacies are interesting because they play on a number of cognitive biases. These include:

  • A tendency to over-attribute success to factors outside of our control
  • An inability to adequately factor in "unknown unknowns" (or factors that we don't know about) when planning for the future.
  • A tendency to underestimate future challenges Empirically, there is both a good and bad side to planning fallacies. Underestimating the scope of a challenge can make you more likely to take it on and consequentially be more creative in solving it.

Writes Hirshman:

Creativity always comes as a surprise to us; therefore we can never count on it and we dare not believe in it until it has happened. In other words, we would not consciously engage upon tasks whose success clearly requires that creativity be forthcoming. Hence, the only way in which we can bring our creative resources fully into play is by misjudging the nature of the task, by presenting it to ourselves as more routine, simple, undemanding of genuine creativity than it will turn out to be. 5

However, empirical evidence suggests that this itself is a fallacy. More often than not, underestimating challenges leads to problems, not creativity. Research by Bent Flyvbjerg and Cass Sunstein suggest that in 78% of cases, projects are obstructed rather than helped by prior ignorance:

The idea of a Benevolent Hiding Hand is a special case and as an effort to capture reality, it is misleading or even a distraction. The Malevolent Hiding Hand is pervasive, and it is a case of the planning fallacy writ large—i.e., it applies not only to schedule, but also to costs and benefits in the widest sense—aggravated by the effects of ignorance, power, and motivated reasoning. The policy implications are equally clear. It is bad policy to justify plans and projects based on faith in the Benevolent Hiding Hand. In most cases initial costs and difficulties will not be overcome by later creativity and benefits; it is a dead-end at best, a scam at worst.

This is important because as Daniel Khaneman and Don Lavallo write,

Executives and entrepreneurs seem to be highly susceptible to these biases. Studies that compare the actual outcomes of capital investment projects, mergers and acquisitions, and market entries with managers’ original expectations for those ventures show a strong tendency toward overoptimism. An analysis of start-up ventures in a wide range of industries found, for example, that more than 80% failed to achieve their market-share target. The studies are backed up by observations of executives. Like other people, business leaders routinely exaggerate their personal abilities, particularly for ambiguous, hard-to-measure traits like managerial skill. Their self-confidence can lead them to assume that they’ll be able to avoid or easily overcome potential problems in executing a project. This misapprehension is further exaggerated by managers’ tendency to take personal credit for lucky breaks. 6

Furthermore, they note that: "the frequency of poor outcomes is an unavoidable result of companies taking rational risks in uncertain situations."

Case Studies

In negative case studies, Wikipedia notes a few very-public projects where cost and times have ballooned as per planing fallacies:

  • The Sydney Opera House was expected to be completed in 1963. A scaled-down version opened in 1973, a decade later. The original cost was estimated at $7 million, but its delayed completion led to a cost of $102 million.
  • The Eurofighter Typhoon defense project took six years longer than expected, with an overrun cost of 8 billion Euros.
  • The Boston Central Artery was completed seven years later than planned costing another $12 billion.
  • The Denver International Airport opened sixteen months later than scheduled with a total cost of $4.8 billion; over $2 billion more than expected. 7

With regards to positive case studies, Malcolm Gladwell retells Hirschman's story of the Karnaphuli Paper Mills in then-East Pakistan:

The mill was built to exploit the vast bamboo forests of the Chittagong Hill Tracts. But not long after the mill came online the bamboo unexpectedly flowered and then died, a phenomenon now known to recur every fifty years or so. Dead bamboo was useless for pulping; it fell apart as it was floated down the river. Because of ignorance and bad planning, a new, multimillion-dollar industrial plant was suddenly without the raw material it needed to function.

The mill’s operators quickly found ways to bring in bamboo from villages throughout East Pakistan, building a new supply chain using the country’s many waterways. They started a research program to find faster-growing species of bamboo to replace the dead forests, and planted an experimental tract. They found other kinds of lumber that worked just as well. The result was that the plant was blessed with a far more diversified base of raw materials than had ever been imagined. If bad planning hadn’t led to the crisis at the Karnaphuli plant, the mill’s operators would never have been forced to be creative. And the plant would not have been nearly as valuable as it became. 8

Sources

1 - Douglas Hofstadter, Godel Escher Bach, 1971
2 - Hirshman, Albert (1967). The Hiding Hand Principle, 1967
3 - Hirshman, The Hiding Hand Principle, 1967
4 - Parkinson, Cyril Northcote (1955). "Parkinson's Law". The Economist. London.
5 - Flyvbjerg, Bent; Sunstein, Cass R. (2015). "The Principle of the Malevolent Hiding Hand; or, the Planning Fallacy Writ Large". Rochester, NY. SSRN 2654423 .
6 - Lavallo and Kahneman (2003). Delusions of Success.  Harvard Business Review.
7 - Wikipedia, Planning Fallacies
8 - Gladwell, Malcom (2013). The Gift of Doubt. The New Yorker.