Planning Fallacy and Organizational Decision-Making

Adding "predictably" to the terms, "behind schedule," and, "over budget."

"Always trust your instincts," is fairly ubiquitous advice. But is it wise?

We'd certainly like to think so. Who wouldn't want a voice in our heads always telling us the right thing to do if we just listen hard enough?

So, as we assess the wisdom of, "Always trust your instinct," we're incentivized to remember examples of our intuitions proving correct (regardless of whether we heeded it). But the countless examples of our intuitions' getting it wrong are a lot harder to remember.

"Sampling error" is what happens when we evaluate non-representative data, which can lead to wildly incorrect conclusions. The ways in which we assess our intuitions are case studies in sampling error.

Planning Fallacy affects us in virtually every facet of our lives. Wherever there is something to do, Planning Fallacy is there to ensure we underestimate it.

We've experienced Planning Fallacy in our studies, our chores, our personal projects, and especially in our work. It's hard to say what percentage of post-5:00 pm e-mails are attributable to Planning Fallacy, but it's definitely a very large number.

But when it comes to organizational decision-making, Planning Fallacy becomes even more complex because it serves even more needs, including social and power dynamics. Confidently articulating an ability to hit difficult future numbers can be a huge career accelerant. Planning Fallacy is the means by which we build that irrational confidence.

What enables us to make the same mistake, repeatedly, over the course of our lives? Were we perfectly rational, we'd learn from our past underestimations and account for them moving forward. And yet, by and large, we don't. We continue to underestimate the time, money and effort required to complete tasks and projects.

There are easy steps we can take to avoid this problem. Yet we hardly ever do. What's behind this behavior, and our resistance to addressing it, individually and organizationally?

As with all cases of systemic irrationality, the answer lies in biases, heuristics and behavioral science.

The Brain's Limitations

The human brain has enough mental energy to process only a tiny fraction of the information available to it. Were people to try to think through every decision, they would become mentally depleted, and effectively paralyzed, by breakfast.

To compensate, human beings have adopted what Daniel Kahneman calls The Dual Systems Theory. Kahneman suggests that people engage in two very different types of thinking: System 1, which is fast, easy and unconscious, and System 2, which is slow, difficult and effortful.

By necessity, we spend the overwhelming amount of our time engaging in System 1 thinking (estimates typically reach 90% and above), reserving System 2 thinking for the relatively rare moments in the day in which we really need it.

If people are spending 90% of their time in unconscious autopilot, it begs another question: who's flying the plane? The answer to that is, "Biases and heuristics," the foundations of behavioral science.

Biases and Heuristics

Biases are mental tendencies, and heuristics are mental shortcuts that help us make decisions without expending mental energy. They fly the plane while we are in autopilot.

Fittingly, people have a bias against the word "bias," because they conflate it with racism, sexism, ageism, and all of the other isms that are worthy of our scorn.

Biases, however, are neither good nor bad. I have a positive bias for people who wear Canvas Chuck Taylor sneakers. As soon as I see them, I feel as though we have shared values and feel a kinship. It's just a mental tendency that helps me avoid spending any of my precious System 2 thinking.

Of course, bias can lead to all sorts of awful problems, especially when we perceive threats where there are none. But the answer is not to eliminate bias, because that is impossible. We could not survive without relying on biases. The challenge is learning how to recognize and mitigate the biases that our rational minds can understand are dangerous.

Heuristics face no such stigma, but play just as big a role in flying the plane in autopilot. Heuristics are mental shortcuts on which we rely when pressed to make decisions we can't "afford" to think through. The affect heuristic describes how we rely on emotions, or "our gut," to make decisions, rather than an extended thought process. Anchoring describes how we hold onto the first piece of information as our reference point in negotiations, without re-evaluating for accuracy or relevance. And availability heuristic describes how ease of recall affects our perception of probability, explaining why people are more afraid of flying than driving, despite the data proving the exact opposite. Plane crashes get a lot more attention than car crashes, so people unconsciously believe they happen more often.

So, what is the cognitive purpose of Planning Fallacy? The same as every other bias or heuristic: to save mental energy. On the positive side, they help ensure we don't spend our entire weekly paycheck on a Saturday night.

The Emotional Purpose of Planning Fallacy

Understanding biases and heuristics as a means of saving mental energy is extremely helpful, but hardly tells the entire story. Because they serve our emotional needs as well.

The primary emotional purpose of Planning Fallacy is to soothe us, since we might freak out if we realized just how much time, effort and money were needed for the projects in front of us.

In that regard, Planning Fallacy can help fuel our dreams. As we imagine the ways in which we can accomplish our most aspirational goals, it is very helpful to assume a smooth and easy path getting there. Planning Fallacy engenders optimism, a major element of its unconscious appeal. Who doesn't prefer optimism when thinking about the future?

Once we decide that something is going to take X weeks and cost Y dollars, we will likely dismiss any information that suggests those targets are unrealistic. The emotional discomfort is too great, a result of the principle of Influence, "Commitment and Consistency."

And finally, we use Planning Fallacy as a tactic to achieve the emotional benefits of early wins. Proclaiming one's ability to accomplish a task faster and less expensively can win opportunities, which feel great in the short-term. How things feel in the long-term is a very different story.

Common Examples and Effects

Given its ubiquity, examples of Planning Fallacy are not hard to find. Among the most notorious are involved in construction:

If you know anyone who has ever sold Software-as-a-Service ("SaaS"), the best way to ruin their day is to say, "Implementation." Because after they work so hard to close deals, they discover the 2-week implementation they were promised is actually a 20-week implementation, where a LOT can go wrong.

Smart investors price Planning Fallacy into their valuations of organizations' drug development, R&D, or product launches. Perhaps no industry is more affected by Planning Fallacy than publishing, as GOT fans discovered.

And while the consequences may not have been nearly as severe, the very same bias is the reason your 3-month plan to get in shape didn't work, and you waited until the night before to start writing your term paper.

Planning Fallacy and Organizational Decision-Making

Both the breadth and depth of Planning Fallacy's impact on organizational decision-making are profound. It all begins with an underestimation of time, money and resources, the result of a sampling error contributing to seriously flawed conclusions. Strategies are formed and projects are greenlit with expectations of smooth sailing and confidence that everything relevant has been considered.

Because strategic decisions are so often made at the executive level, front-line employees with relevant knowledge are nonetheless usually excluded from contributing to those decisions, one of the most tangible contributors to the underlying problem of sampling error. The decision-makers simply fail to account for all the relevant information.

But their decisions have major impacts downstream. If clients or shareholders are provided with unrealistic expectations, the results can be disastrous, from losing customers, losing reputation or even being forced out.

But before that can happen teams will have to rush their work, feel financial strain, and push themselves to the brink of burnout in order to meet unrealistic goals.

And if they somehow succeed in pulling the organization through the worst consequences of Planning Fallacy, their reward will be to do it all over again, as their extraordinary performances allow the company to fail to learn from its mistakes. Meanwhile, the damage to the organization's short and long-term cultures will require herculean efforts to address.

The Existing "Solutions" for Planning Fallacy

The solutions most commonly offered to combat Planning Fallacy are very much aligned with most biases. Maintaining awareness during evaluation, using decision matrices and relying on data are among them.

And these solutions, when attempted, tend to produce great results. The problem is that these solutions are so infrequently attempted.

That is understandable for a number of reasons: it's far too much work given the sheer number of decisions we have to make, and we have far too little mental energy to do so.

For individuals, better decision-making requires intention and discipline, while groups require coordination and facilitation. But even those not enough to overcome Planning Fallacy, because they still fail to address the most powerful obstacle of all: emotional resistance.

The New Solution for Planning Fallacy

If following a structured decision-making process might make someone's past decisions seem foolish, it eliminates their motivation to do it. No one wants to appear stupid, to themselves or especially to a group. If forced into a group structured decision-making exercise, they will be concerned exclusively with impression management, muddying the waters for an honest and objective evaluation.

The point must be made forcefully and effectively upfront: errors in judgment from biases and heuristics are as universal as breathing. Every single human has and will make countless errors in judgment, both consciously and unconsciously. And hindsight is always 20/20. To feel foolish for making errors in judgment is, quite literally, foolish. And it is a huge blocker to growth and improvement.

This mindset is a requirement for an objective evaluation, and facilitators must be skilled in making the point. But even that is not enough.

People's status and positions are often tied to past decisions and/or supportive of the status quo. As such, they are strongly motivated to avoid or muddy any exercise that might threaten that order. This resistance must be eliminated as well. Fortunately, there's a framing to get us there.

Stories of agility success, like Play-Doh, Frisbee and Netflix, and of agility failure, like Kodak and Blockbuster, help to drive the point home.

What makes this the "new" solution to Planning Fallacy is that it addresses the emotional blockers before proceeding to the cognitive exercises. Solutions are meaningless for people not motivated to use them.