Planning Fallacy and Cost-Benefit Implications
One of the most universal and robustly demonstrated cognitive biases is the planning fallacy, and its unsavoury consequences are tasted inside transformation initiatives throughout the world with project and programme managers and transformation leaders systematically under-estimating the amount of time or money they are going to need. Often these under-estimations assume nothing will go wrong, when those that have been involved in complex transformations will know the likely consequences of such naive assumptions.
Bent Flyvbjerg is the BT Professor and Chair of Major Programme Management at the University of Oxford. Together with Cass Sunstein, who is Robert Walmsley University Professor at Harvard University, they published The Principle of the Malevolent Hiding Hand, which is an in-depth 18-page research paper on the subject.
Bent simplified their findings in this LinkedIn post where he explained that due to the planning fallacy, ex-ante estimates of costs and benefits are likely to be biased, with costs underestimated and benefits overestimated, resulting in benefit-cost ratios typically over-estimated by 50-200 percent.
In a famous discussion, Albert Hirschman (seen in the video below) celebrated the Hiding Hand, which he saw as a benevolent mechanism by which unrealistically optimistic planners embark on unexpectedly challenging plans, only to be rescued by human ingenuity, which they could not anticipate, but which ultimately led to success, principally in the form of unexpectedly high net benefits.
Bent and Cass explain that the Benevolent Hiding Hand has an evil twin – the Malevolent Hiding Hand, which blinds excessively optimistic planners not only to unexpectedly high costs but also to unexpectedly low net benefits. They also found the Malevolent Hiding Hand to be more common than the Benevolent Hiding Hand.
Flyvbjerg, Bent and Sunstein, Cass R., The Principle of the Malevolent Hiding Hand; or, the Planning Fallacy Writ Large (September 1, 2015). Social Research, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2654423
Albert Hirschman describes the less common Benevolent Hiding Hand in the video below.