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Planning Fallacy in Business: Definition, Impact & Examples

Instructor: Artem Cheprasov

Artem has a doctor of veterinary medicine degree.

This lesson goes over the planning fallacy. You'll learn what it is as well as some of its root causes. We'll then go over the impact it may have using a case example as well as ways this fallacy can be mitigated.

What is the Planning Fallacy?

The planning fallacy can be summed up this way: people are bad at judging how long it will take them to finish something.

For instance, perhaps your work for a 10-year old small business in a niche market, with 2,000-3,000 social media followers. Your boss tells you that you need to grow that number to 100,000 in the next year. Your boss thinks it's entirely feasible. But is it, for an established small business in a niche market? Perhaps, but a year seems like a stretch, and this could be an example of the planning fallacy.

There are numerous such examples of the planning fallacy. But why does this happen and how can it be mitigated? We go over this in this lesson.

Causes

The causes of the planning fallacy can be boiled down to the following:

1. An under-reliance on one's own past experience in similar ventures.

2. The inability to truly understand how a snag in a lengthy process can delay things.

3. The dismissal of the past experiences of others, or not making an honest comparison of your capabilities to theirs in a similar project.

4. Blaming one's own past failures on outside events as opposed to one's inability to properly plan or account for precisely those same events.

Impact

So what kind of impact could this planning fallacy have? Let's paint a picture of just one possibility.

Acme Co is a construction company. It has been contracted by the city of Springfield to build a bridge. The projected cost: $100 million. Time to completion? 1 year.

Based on what though? Well, historically it has taken Acme 3 years to build similar bridges. But, this time around, Acme has more employees and more experience, and so the engineers estimate they can do a much faster job.

Besides disregarding their own past experiences in similar ventures, Acme also disregarded those of other competitors. They too, even with larger and more talented sets of employees, took about 3 years to build similar bridges in the recent past.

But comparing yourself to a competitor and their abilities and historical records isn't pleasant. It may reveal you're not all that great. So, the past experiences of others are either disregarded, or an honest comparison is never made.

This leads to optimistic predictions. Or, in other words, the planning fallacy.

The end result? The bridge takes 3 years to build, $200 million over-budget.

Mitigation Strategies

Can we mitigate the planning fallacy? Absolutely. Here are just some of the many ways this can be accomplished:

1. Look at your past experiences in similar projects. Is your timeline in-line with that?

2. Look at what competitors went through. Is your estimate in line with that as well?

3. Budget additional time for unexpected events you never experienced before. They can happen, you might have simply been lucky they haven't before.

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