This business case is built on estimates given by experts. But people (humans) are notoriously over confident. And more often than not an exact number is given to which the team members will be held accountable and will have no control over the inevitable problems they will encounter.

To combat these problems, consider these 4 ways to avoid the planning fallacy:

1. Take the outside view: Get outside information on similar projects. How long did they take, what were the costs, what were the risks.
2. Avoid the best case scenario: There are many ways for a plan to fail. Explore then in detail, and examine other similar examples for the types of problems they had.
3. Assume ignorance: Suppose you didn’t know anything about the particular project you are considering. What would be a baseline prediction based on similar base case projects.
4. Avoid the sunk-cost fallacy: Many times we persist in the face of adversity when all the signs are we should stop and cut our losses. Investors are famous for this, holding on to losing stocks for far too long. Instead use zero-based thinking – ask yourself, “knowing what I know now, would I still make this investment?”

This passage in a book am reading, “The Failure of Risk Management: Why it’s broken and how fix it“, by Douglas Hubbard, explains it well:

A bit of wisdom called Hanlon’s Razor advises us, “Never attribute to malice that which can be adequately explained by stupidity.” I would a clumsier and more accurate corollary to this: “Never attribute to malice or stupidity that which can be explained by moderately rational individuals following incentives in a complex system of interactions.” (emphasis added).

People behaving with no central coordination and acting in their own best interest can still create results that appear to some to be clear proof of conspiracy or a plague of ignorance.

I think the Occupy Wall Street people need to read this. Then look at their own incentives they might be reacting to.

–

Even experienced project managers can’t get dates right. Take the Sydney Opera House which was initially estimated for completion in 1963 but was finished in 1972.

Now of course in the case of the Opera house, it may well have been caused by government failure. But it was almost certainly due to the planning fallacy.

Planning fallacy can be summed up by Hofstadter’s law – a cognitive scientist Douglas Hofstadter – which goes like this: It [a task or project] always takes longer than you expect, even when you take into account Hofstadter’s Law.

This is a cognitive bias problem of optimism which has been validated by researchers (this from Less Wrong):

Buehler et. al. (1995) asked their students for estimates of when they (the students) thought they would complete their personal academic projects.  Specifically, the researchers asked for estimated times by which the students thought it was 50%, 75%, and 99% probable their personal projects would be done.  Would you care to guess how many students finished on or before their estimated 50%, 75%, and 99% probability levels?

• 13% of subjects finished their project by the time they had assigned a 50% probability level;
• 19% finished by the time assigned a 75% probability level;
• and only 45% (less than half!) finished by the time of their 99% probability level.

In almost all cases of these students, the estimates they gave of which they felt they would almost certainly  achieve; in other words a highly conservative forecast, they rarely completed the task inside that time frame.

This is the planning (or forecasting) fallacy. People can’t plan.

Another study by Newby-Clark et. al. (2000), showed that there was no difference between asking the students for a realistic ‘best guess’ or ‘best case.’

The problem being that, when asked for a realistic scenario, people leave out all the things that could go wrong.

The way around this problem is to use a different perspective. Instead of looking at the task and making a personal judgement, look at what other similar projects, and find out how long the task took them.

This gets around the problem of people not imagining enough things going wrong. Remember Murphy’s law: if it can go wrong it will.

To add insult to injury, these studies showed that the more detailed people became in their planning, the likely they were to be very wrong. They became more optimistic by being more detailed. This detail orientation causes people to be over optimistic.

From Less wrong:

Likewise, Buehler et. al. (2002), reporting on a cross-cultural study, found that Japanese students expected to finish their essays 10 days before deadline.  They actually finished 1 day before deadline.  Asked when they had previously completed similar tasks, they responded, “1 day before deadline.”  This is the power of the outside view over the inside view.

Take an outside view, instead of inside

So, the way to fix this problem is to look at a project that was broadly similar to the project or task to be undertaken as find out how long that actually took. This will give you an insight into how long to actually expect these projects to take to actually complete. Don’t consider the details of the project.

In the case of the students mentioned above, they were better off by looking at how long previous assignments took and using that as their estimates.

No doubt the executives will be disappointed with the proposed schedule and ask you to shorten it, which you will by considering the detail of the project, but it will take that amount of time anyway, so psychologically you should at prepare yourself for this.

I think the key is judgement. Have a good understanding when you need to do more digging, analysing, and using statistical tools, and when to make a call.

The 80/20 rule applies everywhere, but at some point someone needs to make a call: more details won’t make the outcome any better.

The flip side of this is people jumping to conclusions when in fact they should have thought about it more and looked for root causes, and the key drivers of a problem or situation.

So what to do?

Use your judgement. Good judgement usually comes from experience in making bad judgements. So make decision, reflect on it, and move on. Any given decision probably isn’t going to determine the fate of western civilisation as we know it.

The blurb reads:

Ranging widely over human history and culture, from ancient Greece to the current global economic downturn, Scruton makes a counterintuitive yet persuasive case that optimists and idealists — with their ignorance about the truths of human nature and human society, and their naive hopes about what can be changed — have wrought havoc for centuries. Scruton’s argument is nuanced, however, and his preference for pessimism is not a dark view of human nature; rather his is a ‘hopeful pessimism’ which urges that instead of utopian efforts to reform human society or human nature, we focus on the only reform that we can truly master — the improvement of ourselves through the cultivation of our better instincts.

Written in Scruton’s trademark style– erudite, sweeping in scope across centuries and cultures, and unafraid to offend– this book is sure to intrigue and provoke readers concerned with the state of Western culture, the nature of human beings, and the question of whether social progress is truly possible.

I’ve added it to the wishlist.

Well there are many reasons, among them that companies become protective and fail to innovate, which is true, but in this speech Catmull makes a very interesting point which brings the subtleties.

When after the success of Toy Story, they had a mini munity with the production managers. They all wanted to quit, as they felt like ‘second class citizens’ as treated by technical people and artists.

Catmull and his team fixed the problem by looking for the underlying causes, which he said centred around confusing the information exchange structure with the organisational structure. “Communication needs to be able to happen between anybody at any time.” 

This was the right solution, but then like all great problem solvers Catmull went one step further and asked himself, “How did this happen?”

This is the deeper problem of why successful companies fail. It happened because while things were successful and cutting edge the production people were prepared to put up with the treatment they were receiving. They were making as a trade off until it became too much.

Catmull goes onto liken how this happens in our personal lives with the way we treat our health when we are feeling good; until it’s too late and the body has had enough.

How governments do it. The recent GFC shows that whole economies can do it. Further it can be exacerbated by optimising as I wrote last week.

Andy Grove put it well, and is credited with the motto, “only the paranoid survive.” Andy writes on his Intel page, “Business success contains the seeds of its own destruction.”

Paranoia and scepticism can be unhealthy, when taken to the extreme, but to remain successful over a long time, it pays to maintain the balance. What should that balance be?

As Andy has his mantra, I too have my own: One, be paranoid; two, be paranoid; three, don’t be ridiculous.

Then to make things worse, people then optimise their decisions. For example, betting is all on black.

To quote an article from a friend of mine, over at Digital Scores, here are some examples of why optimising is bad and some simple examples to bring the concept home.

We not only make these predictions and believe them, which alone could be harmless, but unfortunately we go further and refine or optimise decisions when taking on action in anticipation of this understandable future. 

We hastily optimize because we want the best result given that we know what will mostly likely happen in the future. The problem with optimising is that it increases our fragility – we now perform perfectly if our expected future takes hold but perform were than without the optimisation if the future turns out to be different.

Here are some random examples of this over-optimising tendency:

1. Going for a long bush-walk and making a careful calculation to carry ‘just enough’ water to save weight and making the trip as easy as possible (the risk of having too much water is a vastly smaller risk than having not enough)

2. Tendency to carry too many things a short distance in your hands (and fingers)at once. The time savings in this optimisation do not outweigh the advantages of increased robustness for things outside of your mental model when holding less (broken eggs, damaged wrist, e.t.c.).

3. Raising debt when there is increased confidence of future capital growth (this will make you fragile exactly at the time when you require robustness because that growth probably doesn’t exist at this time – future asset growth can be the poorest exactly when one is, as everyone else around us, the most confident)

4. Believing in a particular technology (over-predicting its future importance or even just survival, this part okay on its own) and then (here’s the mistake)committing heavily to its use (over-optimising resources) making you more fragile. A practical example is committing to a narrow scope (more optimised)technology such as a Desktop Application for a particular machine rather than aa base technology such as the Web Browser.

5. Using mathematical equations to calculate risks/rewards and then making an intricate financial decision3 – the more optimising the more our decision becomes fragile to the future not turning out the way you predicted (and the predictions are false more often than we expect).

6. Favouring taking on insurance for more recently occurring catastrophes (narrative is more tightly held in memory so it appears to be more predictable and likely) in preference to catastrophes that have not occurred for a long time.

7. Favouring taking on insurance more specifically defined policies (making the event appear to be, without actually being, more predictable because of increased narrative stimulating positive memory association) in preference to catastrophes that had more broadly defined policies. Of course the preference should be in the opposite direction.

Since we are overconfident about our view the future and tend to over-optimise, what is the solution?

Firstly to understand that we do not know anything about the past (our knowledge is curve-fitted, narrative-based and selected for agreement and easy communication) nor the future (overconfidence arises from biased account of the past)– in other words, to understand that we don’t really know anything.

When that is achieved then the second step is to create an environment around us that is robust to the variety of possible outcomes including unlikely ones that might lie ahead.

The reverse of this is helpful to consider: The largest mistake that can be made is then to start by being confident about one particular version of the future (okay on its own) and then heavily optimise everything we do for maximum success under that version(unless you enjoy blowing up).

Business managers are not trained to learn/discover.  Rather they are trained to decide about transactions.  Consider the MBA curriculum core:

• Finance–how to value transactions
• Accounting–how to track transactions
• Strategy–taught as a transactional discipline of entering or exiting markets based on relative strength and weakness
• OM courses–heavily pervaded by analytical tools (in support of decisions)

Largely absent: scientific method, experimentation, exploration, learning methods, teaching methods, etc.

This is really about uncertainty and risk; or more specifically Probabilistic Decision-making.

Case-studies and retrospective thinking give us a sense of certainty, that everything will be OK, and when something goes wrong, managers freak out, stomp around and sack people. But the reality is: Murphy exists.

We need to accept reality.

At the base of scientific thinking is the notion that knowledge isn’t perfect, in which theories are just that; theories, until proven otherwise. That we are making decisions based on what we think is most likely to happen. We develop heuristics over time to help us make judgements and these usually come with experience.

Making decisions under uncertainty means, building in time buffers to protect meeting delivery deadlines. It means putting in place preventative actions to protect a plan in case it goes wrong. It means checking our assumptions. When problems occur, finding the root cause, before leaping to conclusions. Looking for cause not blame, and creating a hypothesis before rolling out a solution.

Management is both an art and a science. Good management brings together the gut-feeling (art), and facts and figures (the science), to create good judgement, or what I like to call gut-fact.

But we must still work to protect a plan. Below is a model for thinking about risk, and how to generate ideas for a comprehensive action plan to first, prevent things from going wrong, and then in case it does go wrong, have a back up plan.

In the below table, you are either at cause or effect. Either taking actions to fix the cause (now) or preventing these from happening (in the future). So, understanding where you are are you dealing with a problem now? If so, then taking corrective action to remove the cause will solve the problem, but until that fix is in place we need to take adaptive actions.

To prevent bad things from happening in the future, say, a house fire, we clean the gutters of dead leaves in preparation for the summer.  Contingent actions to deal with this by having water sprinklers which turn on in the event of a fire.

Think through you plan and brainstorm the possible bad things that could happen, their potential causes, and preventative actions. Of course things always go wrong no matter how well we plan, so what  contingencies will you put in place that become adaptive actions if this risk should manifest, until you can take corrective action to remove the cause.

Always remember that for every contingent action you have, think of three or four preventative actions you can take.

The rule of thumb as to how many and where to stop is numb one, be paranoid, number two, be paranoid, number three, don’t be ridiculous. Another words: Use your judgment.

‘Helping Leaders build great organisations”

www.DanielLockConsulting.com

(C) Daniel Lock.

But measuring is not enough:  Sure, measure, but also get organized. Get super-organized for rapid response – to your customer, quality is responding to their needs – rapidly!

Great theory, but you have to implement it.  That’s the hard work – push it through and get it done. In tough times like these the key is to measure more and get organized more.  Get super-organized and get on top of the job you are doing.

Let me give you an example of what I mean

The heyday of the mortgage boom was five or six years ago. The Big Thing was turn-around time from enquiry to completion. At first for me it was 7 days, and then it went down to 3 days and then 24 hours. You had to get their money and get them out of the market before they could look elsewhere.

That meant being super-organized and responding immediately to their needs so that their needs were met before they could blink.  No need to look elsewhere!

The same is true now. If a client wants something get it there immediately. Special Delivery, courier, whatever you need to do. Speed wins! Same day call returns, immediate email responses.  Immediate response in any way possible to get the thing done and dusted before any change of mind.

You can measure that because the results are measurable. Get organized, and measure what you can. High speed reaction gives measured results. Instant response to a need brings return customers.

Personal AND Professionally

The same is true of you, personally. Get organized, and you can pass that organization onto your business. Producing immediate response and securing the customer or prospect ASAP takes organization – personally and institutionally. Getting yourself organized is the first important step.

That applies to your home life as well as your business life.  If you are disorganized at home how can you change at work?  You can’t.  Get organized in every facet and aspect of your life, at home and at work, and you will find converting a client a snip.

Get your personal problems and relationships sorted out, get rid of any unnecessary obligations, and get fit and healthy.  Then you can focus on your work without anything coming in between and compromising your success.

Instant response at home and at work:  they go hand in hand, and those that can offer instant response without thought will get there first. Think on it and act on it.

‘Helping Leaders build great organisations”

www.DanielLockConsulting.com

(C) Daniel Lock.