The Planning Fallacy

Why people and governments consistently underestimate how long projects will take and how much they will cost, and how to plan more realistically.

Have you ever planned to finish an assignment in two days and taken a week? You are not alone. People systematically underestimate how long tasks will take and how much they will cost, even when they know similar tasks took longer in the past. Daniel Kahneman and Amos Tversky called this the planning fallacy.

Why it happens

Optimism bias: people imagine the best-case scenario.
Focusing on the specific plan: people picture the steps of their own project and ignore how often similar projects ran into problems.
Ignoring unknowns: unexpected delays, such as illness, supply problems or rule changes, are hard to imagine in advance.
Incentives: in business and government, optimistic estimates can help projects get approved.

Big projects

The planning fallacy is especially costly for large infrastructure projects. Research by Bent Flyvbjerg, who studied thousands of projects worldwide, found that the great majority of large projects run over budget, over time or both. The Sydney Opera House, planned in the late 1950s to take a few years and cost around 7 million Australian dollars, opened in 1973 after costs had risen to over 100 million.

Reference class forecasting

A powerful remedy is reference class forecasting: instead of estimating from the details of your own plan, look at how long and how much similar projects actually took. Then adjust from there. This “outside view” corrects for optimism. Several governments, including the United Kingdom, have used it for infrastructure planning.

Renovating a kitchen

A family plans a kitchen renovation expected to take three weeks and cost 200,000 rupees. Their builder's estimate looks detailed and reasonable. But when they ask friends about similar renovations, most took two months and cost 30 to 50 percent more. By planning with that outside view, the family budgets extra time and money and avoids a stressful shortfall.

Personal strategies

Break tasks into steps and add a buffer to each.
Compare with past experience honestly.
Ask others how long similar tasks took them.
Set internal deadlines well before real ones.

Thinking a detailed plan guarantees an accurate estimate

Detailed plans can make people more confident without making them more accurate, because they focus attention on what is known and away from the unexpected. Looking at outcomes of similar past projects is often more reliable.

Key takeaways

The planning fallacy is the tendency to underestimate time and cost.
Optimism, focus on specific plans and unforeseen events drive it.
Most large projects run over budget or schedule, as Flyvbjerg's research shows.
Reference class forecasting uses outcomes of similar projects to plan realistically.