Reference-class forecasting overcomes the planning fallacy

Unless they carefully avoid it, people who are estimating the cost and time needed to complete a project are susceptible to the planning fallacy—confusing the “best guess” with the “best case” for the project. The solution is to take the ”outside view” by implementing reference-class forecasting. Kahneman notes the importance of reference-class forecasting:

This may be considered the single most important piece of advice regarding how to increase accuracy in forecasting through improved methods. Using such distributional information from other ventures similar to that being forecasted is called taking an “outside view” and is the cure to the planning fallacy. … The outside view is implemented by using a large database, which provides information on both plans and outcomes for hundreds of projects all over the world, and can be used to provide statistical information about the likely overruns of cost and time, and about the likely underperformance of projects of different types.^[1]

The forecasting method is summarized as follows:[^2]

Identify an appropriate reference class (kitchen renovations, large railway projects, etc.).
Obtain the statistics of the reference class (in terms of cost per mile of railway, or of the percentage by which expenditures exceeded budget). Use the statistics to generate a baseline prediction.
Use specific information about the case to adjust the baseline prediction, if there are particular reasons to expect the optimistic bias to be more or less pronounced in this project than in others of the same type.

#fallacy #management #cognition