Planning fallacy

Introduction

You may have seen over enthusiastic managers fails to deliver according to their predictions and have to run around for cover at the end of the financial year.

The planning fallacy is the tendency to underestimate task-completion times. It is a consequence of the tendency to neglect distributional data and to adopt what may be termed an internal approach to prediction, in which one focuses on the constituents of the specific problem rather than on the distributional outcomes in similar cases. Let us discuss about the causes and how to overcome the same.

Cause and effect

Managers make decisions based on the delusional optimism rather than on a rational weighting of gains,losses and possibilities. They overestimate benefits and underestimate time and costs.They spin scenarios of success while overlooking the potential for mistakes and miscalculations. As a result , managers purse initiatives that are unlikely to come on budget, time frame and so fail to deliver.

Executives planning fallacy can be traced as broadly two- Personal and organizational. The planning over optimism can be because of an overenthusiastic mind, or because of organizational pressures.

Personal planning fallacy

We as a executives of modern era are highly optimistic in our approaches. We sometimes are asked to being optimistic, and getting realistic sometimes is termed as pessimism by others. Again there is a powerful tendency of the individuals to exaggerate their own talents to believe that they are above average in their own talents of personal traits and abilities.

On an average 2% admits that they are below average. Its human nature to find fault with the environment and be overoptimistic at every point , even if we have a rarest of rarest chance of winning . The Human nature of taking credit for positive outcomes and attribute negative outcomes to external factors, no matter what their true cause.Physiologists call it attribution error . Managers are not that different on attribution error . They tend to take credit for their performance on their own actions and abilities on a favorable condition like good stock market and find faults with external factors (Stock market again) when the outcome is not favorable.

a.Biased beliefs

People tend to underestimate the amount of time and resources it will take them to complete a task. The inclination to exaggerate our talents is amplifies by our tendency to misrepresent the causes of certain events. Executives takes into control favorable factors that aid them, while unfavorable factors and conditions are swept under the carpet. We also tend to exaggerate the degree of control we have over events discounting the degree of luck.Like other people business leaders routinely exaggerate their personal abilities , particularly for ambitious ,hard to measure traits like managerial skill. Their self confidence can lead to assume that they will be able to avoid to easily overcome the potential problems in the future. This misapprehension is further exaggerated again by managers tendency in taking credit for lucky breaks.


Managers see risk as a challenge to be met by the exercise of skill, and results are met by the exercise of their own sill and by the organization. Even of those mangers are true, as they are in full control of both people and events, they tend to ignore or downplay the possibilities of random and uncontrollable occurrence that impede their progress towards a goal.

Managers or organization can have limited visibility or limits or human imagination. While planning , we may not have the visibility happening at the time of project execution. The manager must not have considered all the possible sequence of events that can delay or otherwise disrupt the project. Ideally the manager has to consider all possibilities - even if micro- before having an estimation.

b. Planning mistakes

1. Competitor neglect
One of the key factors influencing the business initiatives is competitors behaviour. While making forecasts executives tend to focus on their own capabilities and plans and neglect the potential abilities and actions of rivals.

Neglecting competitors can be destructive in efforts to enter new markets. When a company identifies a new market which suited its products and capabilities it often rushes to to gain a beachhead on it, investing heavily in production capacity and marketing. They wont take into account that new companies also target the same market or some of the old sleeping players suddenly wake up and starts aggressively. Suddenly the companies reach a checkmate seeing more players attacking a limited market.

2. Anchoring
When executives and their subordinates forecasts a projects, they typically has a project plan based on market research, financial analysis and their own professional judgement. This proposal can be error prone due to overoptimism.

It is estimated that half of the start-up companies produced less than 75% of their design capacity, with another quarter producing less than 50%. Many of the plants had their performance expectations permanently lowered, and the owners never realised a return of investment.

3. Organisational pressure


Every organisation will have a limited resources to devote to new projects and competitive executives are compelled to fight for their pie. Thus the projects selected can itself be over optimistic as well as the forecast inside each project tasks.

Every organisation encourages optimism and risk. They actively discourage pessimism and is interpreted as disloyalty and laziness. The realistic executives are suppresses while the optimistic ones are rewarded thus making the organisations critical thinking ability underlined.

The optimistic biases of individuals become mutually reinforcing and unrealistic views of the future are validated by the group.

How to contain Planning fallacy
There has been different studies to show how to differentiate between fallacy and realism. We have a discussion on some of them.

1. Understand the source of overoptimism and correlate with present data.
2. organisation has to bring in their own framework of estimation for an objective understanding of the forecasting process
3. Reference class forecasting -An outside view of the estimation and forecasting process. This includes an outside consultant who is experienced enough to bring an unbiased understanding of the data as well as forecast.

The strategy which is to be adopted depends on the situation itself. The organisation getting into a niche market may take the first approach, while an organised firm getting into another similar project may prefer second approach. A New company diversifying into a New and unfamiliar technology in a new terrain may go for the third approach as well.

Outside view

Making a forecast using the outside view requires planners to identify a reference class of analogous past initiatives, determine the distribution of outcomes for those initiatives. This efforts is categorised into

1. Selecting a reference class
2. Access the distribution of outcome
3. Make an intuitive prediction of your projects position in the prediction
4. Assess the reliability of your prediction
5. Correct the intuitive estimate.

There are several mathematical formulas associated with the reference class forecasting . Right now that is outside the scope of this discussion

Differentiation between Optimism and fallacy

Optimism generates much more enthusiasm to the people than does realism. It enables people to be resilient when confronting difficult situations and challenging goals.Companies has to surely promote optimism for their employees to remain motivated. The tendency towards optimism is unavoidable. The organisation has to really differentiate between risk- optimism- and fallacy. No organisation will ever want to remove the organisational pressure and thus promote pessimism.

The point but is that there must be a balance between optimism and realism- between forecast and goals. The unrealistic optimistic approach can surely trigger the team to reach new heights , but an outside realistic view will help the manager to keep the expectation right. The ideal situation is to draw an imaginary line between the planning and achievable goals.

The senior managers has to be optimistic and realistic at the same time. While pushing the team to an unrealistic goals, he has to understand that the reality through an outside reference class forecasting. More objective forecasting will help to choose the goals wisely.