How project estimations fail

We humans are terrible at estimating effort. Large projects are consistently delayed and they invariably overshoot their budgets. This phenomenon is dubbed the planning fallacy. Let us explore why it happens through a simple thought experiment.

Imagine you had a large urn with 90 red balls and 10 white balls. Which of the following bets would you rather prefer? Try answering intuitively.

1) Picking 7 red balls from the urn in a row (with replacement and shuffling), or a fair coin-toss?

2) Picking at least 1 white ball from the urn from 7 trials, or a fair coin toss?

In an experiment, most volunteers opted for the 7 red balls over the coin-toss, and the coin-toss over the white ball. However, the odds of picking 7 consecutive red balls from the urn is 0.48 – a little under 0.50, while the odds of picking at least 1 white ball is 0.52 – slightly better than a coin-toss. Sure, those values are pretty close. But this experiment exposes an underlying and systematic error of the human mind in planning large projects.

In the first case, it is easy to see from that drawing one red ball from the urn is far likelier than drawing one white one. Therefore, our mind is anchored on how easy this event is, and pays less heed to how the same event needs to replicate 7 times in succession. It overestimates the likelihood of drawing a red ball, while underestimating the number of times this needs to happen. This is what happens when we plan large projects. In such projects, a large number of activities need to happen in succession. While each of those things might have a high likelihood of success, it is difficult for all of them to succeed when they have to happen consecutively. During our estimation, we simply add up the effort (or costs) of these successive tasks, while paying insufficient heed to how they are interdependent.

In the second question, we quickly realize that drawing a white ball from the urn is an unlikely event. In this case, our mind anchors on the rareness of this event, and extrapolates it to estimate overall likelihood. In doing so, it neglects the large number of trials – 7 in this case. In large projects, this tendency of the mind leads us to neglect rare events, such as setbacks, illnesses of team members and budget deficits, while drawing up our estimates. And yet, merely one key activity needs to fail in order to disrupt a project’s plan.

Our planning often misses its mark because we are focused on positive outcomes while neglecting setbacks. The only way we can mitigate this fallacy is by learning from past projects of similar magnitude, and by including buffers within our schedules and budgets. The closer we get to understanding the limitations of our brains in understanding a complex succession of events, the more likely we are in making accurate estimates of how long projects take and how much they would cost us.

Inspiration: Judgment under Uncertainty: Heuristics and Biases – Amos Tversky and Daniel Kahneman

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