If you've spent 2 minutes around me, you've probably heard me reference the fact I used to live in Bondi. And why wouldn't I? Sydney is a flawed city to live, but an evocative and inspiring place all the same.
When you think Sydney, you probably think of the Harbour Bridge and The Sydney Opera House, an iconic symbol of architectural and cultural brilliance. Sorry to ruin it for you...but after this article, I want you to think of as a fundamental for all leaders to understand: the Planning Fallacy.
Behind those stylish curves, is the construction delay of 10 years and a cost overrun of $102 million, a staggering 1,357% increase from its original budget of $7 million. Read those numbers again...talk about 'iconic'.
I don't know about you, but I get stern looks from clients if I go even 1.35% over budget. But when I first read this, I was tempted to dismiss it; firstly, the lifetime ROI has surely made up for this bungled start...and secondly, this is sure a once off goof up?
Enter Professor Bent Flyvbjerg. As I previously wrote, this articulate Gentleman has spent his lifetime studying big project - "mega", even. Turns out...this phenomenon is not unique to the Sydney Opera House. In fact the original study by Professor Flyvbjerg's that caught my attention, was this one of 258 large transport infrastructure projects worth $90 billion USD. The outcomes? 9 out of 10 projects had significant cost and time overruns. Want a bigger data set? The 16,000 one in his latest book "How big things get done" ought to scratch that itch.
But what does this mean for you? Assuming you're not trying to build another Sydney Opera House...chances are, you are contributing to, leading or advising a project that's just as 'landmark' for your organisation. If that's the case, you (just like myself and all your colleagues) are fallable to the beguiles of bad planning.
The Planning Fallacy is a cognitive bias where individuals underestimate the cost, time, and risks involved in a project while simultaneously overestimating their previous experience and capabilities.
It's important to grasp the duality of this; we underestimate tangibles and "knowns" (cost, time and risks)...yet we overestimate the intangibles of 'experience' and capability. Take a quick moment to reflect, on how much of organisational life is skewed towards a trust in experience - sometimes for very good reason, but not without consequence.
Discovered by behavioural economics demi-gods Kahneman and Tversky, The Planning Fallacy plays out in the cognitive and emotional factors that affect decision-making in leadership. Moreover, the modern organisations we work in, unfortunately prime us to fall victim to the fallacy - both in our hearts and in our minds.
Limits of the Human Mind
My favourite AHRI article of the last 10+ years, laid out in plain speak what all leaders had been feeling and living for a long time; all our clever interventions are "adding"...when really, we need to be "subtracting". We slam our teams and their leaders with things to do...so they have very limited time and severely depleted methods for thinking. With this backdrop, I've observed how (very normal, very human) cognitive limitations can significantly impact leaders' abilities to accurately estimate the tangibles - especially at scale, and when things are "busy".
The human mind has several cognitive limitations that can contribute to the Planning Fallacy:
It takes practice to thrive in the complex: The complexity of large-scale projects makes it challenging for the average individual to accurately estimate the required resources, time, and potential risks involved. For example: chances are, you were trained in one of the disciplines required for this project masterpiece to come together...but what the heck does an Enterprise Architect do?! What are they even talking about...? (Note: it's fine, they're actually really cool and helpful if you know the right ones - promise)
Bottom line: Humans learn by doing...and that means you're probably going to make mistakes. If it's a complex project, there's very likely 'learners mistakes' in it.
Inadequate memory skills: People tend to have selective memories of past experiences, often forgetting the negative aspects, which can lead to overly optimistic expectations in project planning and whilst projects are in flight. There's a stack of research on just how faulty our memories can be, but if you want my favourite it's the 'peak -end' rule...very important to know for broader service design!
Linear, narrative view of events: Individuals often adopt a linear perspective of events, failing to account for the non-linear and unpredictable nature of projects, organisations and the broader economy. Moreover, humans have an insatiable appetite for stories; we are quickly seduced by a narrative and often get rewarded in organisations for creating compelling ones.
The most startling part of the Planning Fallacy: you'll probably ignore this article
Critically, leaders will tend to ignore new information that shows they are at risk. To paint this concerning picture very clearly: if you ask experienced business leaders to estimate and plan something relatively complex...and during their estimation and planning process, you make an effort to further highlight the flaws in their methods or underweight assumptions in their thinking AND present new information which shows their previous inaccuracy...they will be reluctant to change their work.
I particularly see this hesitation when facilitating strategic planning sessions with Executive teams, or transformation programs adopting their version of agile. Given my typical engagements last for more than 3 months through to a year, I'm involved in sifting through the debris of missed targets, unrealised expectations and damaged relationships.
(Note: I obviously give my best efforts to help clients avoid these scenarios, but often plans have been set on longer cycles at Board level or by more unscrupulous external advisers...)
There's no definitive answer as to why the honed skillsets and rationale of decent leaders fall trap to this Planning Fallacy...but given organisations are made up of people, it's worth exploring the emotional side of leadership too.
Fear in Our Hearts
As a seasoned organisational development and change practitioner, you can quickly spot where emotional factors can be equally as powerful in driving the Planning Fallacy. Overlook them at your budgetary peril.
Emotional factors that play a significant role in the Planning Fallacy include:
Optimism bias: People naturally prefer to hold optimistic beliefs, which can lead them to underestimate potential obstacles and overestimate their own capabilities. It's worth noting, that this optimistic is not necessarily sinister; in fact it can often be borne out of a 'people pleasing' need. But both the eternal optimist (and eternal pessimist for that matter) do not serve the best interests of an organisation making its way in a complex and competitive world.
Strategic misrepresentation: Planners and those leading the planning may deliberately underestimate costs and risks while overestimating benefits to secure funding and support, driven by the desire to see their projects succeed. Put simply, in most organisations it's easier to make short term, self interested decisions...than it is to be 'courageous' and point out the best long term interests. We use our Apricot Health Index to build a cultural maturity where those types of long term decisions are rewarded, but (sadly) this type of thinking is yet to become the norm.
Fear of failure: The pressure to succeed can lead leaders to ignore new information that indicates potential risks, avoiding difficult conversations and decisions that might expose vulnerabilities.
Clearly I'm only just skimming the surface of the emotions and political motivations that lurk within organisations. We coach leaders to have the poise, to ask the right questions in the right way...but it all starts with a decision to do so.
To mitigate the Planning Fallacy, apply your own touches to the following guidance:
Break down tasks into smaller components: By dividing a project into smaller, more manageable parts, you can more accurately estimate the time and resources required for each component, avoiding underestimation of the overall effort. Yes, this is project management 101...but in busy project environments it's easy just to be "getting stuff done", rather than really thinking through the most effective approach. I do align with the agile practitioners on this one; the art of estimation is one well worth learning.
Get a rounded view: Encourage an environment where all the project team members feel comfortable discussing potential risks and challenges, allowing for a more accurate assessment of project timelines and costs. Let's not sugar-coat the fact that building this kind of rapport and understanding amongst a team is an investment of time; but you don't need to look too hard to find evidence of better risk management through diverse teams. Want a 'golden bullet'? Involve the "end" customer in decision making.
Acknowledge this bias and "call it out": Recognise the potential for deliberate underestimation of costs and overestimation of benefits in project planning, especially in re-baselining and updating estimates. What is suitable in terms of 'transparency' will differ across organisations...but a strong step in the right direction is acknowledging our very human inclinations.
And in a perfect world...use Reference Class Forecasting (Outside-In View): Use data from similar past projects (in relevant "reference class" industries) to create more accurate estimates for the current project, reducing the impact of the Planning Fallacy on decision-making. I acknowledge that this is a heaven where information symmetry abounds...but even just a well facilitated hour of prompting leaders and their teams to take a more "Outside-In" view, yields wonders in terms of unearthing risky assumptions and under-considered decisions.
By understanding and addressing both cognitive and emotional factors that contribute to the Planning Fallacy, leaders can make better decisions, manage risks effectively, and ultimately lead in a way that can be scaled.