What Is Planning Fallacy and How to Deal With It?

The concept of the planning fallacy was first introduced by psychologists Daniel Kahneman and Amos Tversky (the “fathers of behavioral economics”). In their extensive research, they have shown that the planning fallacy can lead to poor decision-making, and can have negative effects on the projects and teams working on them.

What Is Planning Fallacy and How to Deal With It?
In this guide, you’ll learn:
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What’s the Planning Fallacy?

The planning fallacy is a cognitive bias that leads people (or organizations) to underestimate the time, costs, or risks of future activities (e.g., tasks, projects, etc…). This “underestimation” is almost always accompanied by “overestimation” of the types of benefits those “future activities" can bring. 

For example, the planning fallacy can lead to companies underestimating the time it takes to complete a specific project, as well as overestimating the profits the project would bring.

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Why Does It Happen?

One of the main reasons for the planning fallacy is that people tend to be optimistic when pondering the future (in general) and their future actions (i.e., future projects). They typically focus on the positive and make estimates without taking into account worst-case scenarios. 

With project estimates specifically (e.g., cost or time estimates), this often translates into a tendency to focus on the “good parts” of similar past projects and use that data to make new estimates rather than objective information. 

The easiest way to explain this would be to use nostalgia as an analogy — when we’re nostalgic, the memories we recall usually leave us with the impression that things used to be better and much less complicated than they realistically were or than they are now. So, you can look at the planning fallacy as a sort of nostalgia for past projects that prevents people from making accurate project estimates.  

To neutralize the effects of the planning fallacy, you should mindfully take a more realistic position when making estimations and make a conscious effort to use the “negatives” as well as the “positives” in your decision-making process. By evaluating costs, risks, and benefits more realistically, you can generate more accurate project estimates — which almost always lead to more favorable outcomes.

Why Is It Important to Understand the Planning Fallacy?

When teams consider or start working on a new project, there’s always a certain degree of enthusiasm and positive energy. Both can add a lot to a project but also have a negative impact if left unchecked. 

The planning fallacy presupposes that people in a positive (optimistic) state of mind are less likely to consider negative outcomes or even want to consider them. Thinking and discussing all the possible worst-case scenarios can ruin the mood, offset the team’s cohesion, and negatively impact their motivation regarding a new project. This is why there is a general proclivity to stay positive and simply reject all the negative information. But, the main problem with ignoring the potential negative aspects of new projects is that it can lead to:

  • Miscalculating and underestimating the costs required to successfully finish a project
  • Underestimating the time required to complete a project or creating an inaccurate project timeline
  • Not focusing enough on potential risks and misjudging the benefits that finishing a project can bring (usually related to the profit)

When you understand that people are, in general, optimistic about future projects, you can reduce the impact of your own cognitive bias (i.e. planning fallacy) through awareness and preparation.

Examples of the Planning Fallacy

1. The Sydney Opera House

The Sydney Opera House is one of the most beautiful structures ever created by humans, but not many know the story of its construction

The original project cost was set at AU$7 million. By the time the construction finished, the building’s accumulated costs reached more than AU$102 million. The original plans for the Sydney Opera House estimated that it would take 4 years to finish construction. In reality, the timeline for this project was overly optimistic, and the whole thing took 10 years longer to complete than originally estimated. In total, the Sydney Opera House took 14 years to build.

2. The Canadian Pacific Railway

Going back in time, in 1871, British Columbia decided to join the Canadian Confederation. In exchange, Canada promised to build railways that would connect British Columbia with the eastern parts of Canada. According to the original plans and time estimations, the whole project was supposed to be completed by 1881. In reality, building that railway took 4 additional years, and was completed in 1885. The original costs were exceeded by more than $20 million. 

The main reason behind this obvious planning fallacy was that the original plans did not consider the difficulty (i.e. risks associated with the project) and the amount of workers they would need to finish the project.  One of the main difficulties they encountered was clearing rocks (particularly granite) for the railway. The original type of dynamite they used proved to be insufficient, and they needed to switch to a more explosive type that was so easily ignitable that it could only be delivered by hand (meaning they couldn’t use carriages or train tracks to deliver it).

3. The Boston’s Big Dig

The Big Dig was a highway and tunnel project in the city of Boston, estimated to run from 1982 to 1998. The original budget was set at around $2,8 billion. Because of the planning fallacy, the risks and engineering complexities associated with the endeavor were not fully taken into account. Instead of being done in 1998, the project was completed in the last month of 2007 and its final costs almost reached $15 billion.

Tips to Avoid the Planning Fallacy

4 Tips to Avoid the Planning Fallacy

Just being aware of the planning fallacy is not enough. To counteract it, you need to take conscious action:

1. Gather and Use Historical Data From Similar Projects

The easiest way to combat the planning fallacy is by gathering project data and using it when making estimates for new projects. 

For example, if you’re looking to make a timeline for a new project, you can do that by inspecting all the relevant data from previous similar projects. But, before you can evaluate that information, you have to ensure that you actually have it (i.e. that you collected it) and that it’s accurate. And to do that, you can use time-tracking software. With it, you’d be able to easily record how much time each task took to complete, and use that data to make informed and more precise time estimations (i.e. create a project timeline).

2. Be a Bit Less Optimistic

Don’t allow the excitement for a new project to cloud your judgment. This doesn’t mean you have to be pessimistic, but keep in mind how optimism can contribute to the planning fallacy. Take into account all the possible negative outcomes and risks. Ask yourself questions such as:

  • Are there any factors that can negatively affect the project?
  • What are those factors?
  • Are there some types of costs that we might be overlooking?

3. Look for Critics 

It can be difficult for the people directly involved in the project to approach it critically. That’s why it’s beneficial to look for third-party critics. These could be consultants, who have the expertise to realistically evaluate your plans for a project or colleagues who have adequate knowledge but are not directly working on the project.

4. Use Digital Solutions 

Digital tools can help you deal with the planning fallacy by providing you with a clear overview of different project-related information. You can try various project management software solutions to help you keep track of project costs and the different teams working on it, and use that as a way to approach projects with a more critical mind. 

If you need accurate information about task duration and want to use that to create accurate time estimates, you can try different time-tracking apps. They are usually simple to use and can give you enough information with which you can curtail the negatives of the planning fallacy. 

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Key Takeaways:

  • The planning fallacy steers people or companies to underestimate project requirements and overestimate project benefits.
  • Understanding the planning fallacy can help companies avoid underestimating the costs, time to complete, and risks associated with future projects. 
  • A good way to avoid the planning fallacy (and any related issues) is to rely on historical data and digital solutions. You can use them to make data-driven decisions that won’t be impacted by cognitive biases.