By June 1999, the budget for the building had increased to $181 million.
In April of 2000 legislators imposed a $324 million ”cap on costs” and by November 2001 they demanded an estimate ”final cost” of $400 million.
That estimated final cost then rose twice in 2002, ending the year at $489 million. It then rose three more times in 2003, reaching $624 million by June.
In 2004 the building was finally completed at an ultimate cost of roughly $716 million, more than 10 times as expensive as the initial estimation.
Messing Up The Budget
The Scottish Parliament building is one of the most famous examples of massive cost overruns, but it’s far from the only one.
Other examples of cost planning gone haywire are:
• The Sydney Opera House, that ended up costing 1,400% more than estimated
• Concorde supersonic airplane, 1,100%
• Boston’s Big Dig, 275%
• Denver International Airport, 200%
• Copenhagen metro, 150%
• Northeast Corridor rail line, 130%
• Channel Tunnel, 100%
How is it possible for such huge projects to go so insanely way off their budgets?
It’s very tempting to think that the people doing the planning and estimating must’ve been complete schmucks who had no idea what they were doing.
But the truth is that they are just victims of a very common cognitive bias that you and I have as well, namely:
The Planning Fallacy
This refers to people’s tendency to underestimate time, costs and risks of future actions and at the same time overestimate the benefits of the same actions (1).
In a 1994 study (2) 37 psychology students were asked when they thought they would complete their personal academic projects. The researchers specifically asked for times by which the students thought it was 50%, 75% and 99% probable that their projects would be done.
Here’s what they found:
• 13% of subjects finished their project by the time they’d assigned a 50% probability level.
• 19% finished by the time assigned a 75% probability level.
• And only 45% finished by the time of their 99% probability level.
The researchers wrote:
“The results for the 99% probability level are especially striking: Even when asked to make a highly conservative forecast, a prediction that they felt virtually certain that they would fulfill, students’ confidence in their time estimates far exceeded their accomplishments.”
When another group of researchers performed a study in 2000 (3) they found a clue to what was causing this. When they asked subjects for either:
1. Their predictions based on realistic ”best guess” scenarios, or
2. Their hoped-for ”best case” scenarios
… They got the exact same results (!).
When people are asked for a best guess realistic scenario they envision everything going exactly as planned. They anticipate no delays of any kind and end up with the same vision as their hoped-for best case scenario.
How to Plan Effectively by Taking The Outside View
”There are many ways for any plan to fail, and although most of them are too improbable to be anticipated, the likelihood that something will go wrong in a big project is high.” – Daniel Kahneman
Reality unfortunately doesn’t correspond well at all to our usual way of planning. Unforeseen delays in all shapes or forms will always be coming our way.
The problem is that they are just that; unforeseen. And since they’re not possibly to anticipate beforehand we’re blind to them.
The good news is that there is a way to protect ourselves from the planning fallacy, and that is done by a ”debiasing” technique called ”Taking the Outside View”.
What you do is avoid estimating the time or cost of a project by trying to visualize and anticipate the outcome. Instead, look for previously completed projects of similar type and scale and then base your estimate on them.
• When planning how much time you need to get ready in the morning don’t imagine what tomorrow morning will be like. Look at how much time you usually need every morning and make this your estimate.
• When planning your Christmas shopping, don’t imagine how much time or money you’ll need. Remember how much time and money is usually needed every year and plan accordingly.
• When planning your kitchen renovation, don’t assume you know how much it will cost and how long it will take. Find out what similar projects have cost others and how long it took them.
It’s pretty obvious when you think about it. Your important planning should be based on data rather than your own wishful thinking and vague estimates. Still people continually fall into the trap of the planning fallacy.
The next time you’re in planning mode, avoid the temptation of trusting your own biased judgment and take the outside view instead.
Your calendar and wallet will thank your for it. 🙂
- Lovallo, Dan; Daniel Kahneman (July 2003). “Delusions of Success: How Optimism Undermines Executives’ Decisions”.
- Buehler, Roger; Dale Griffin; Michael Ross (1994). “Exploring the “planning fallacy”: Why people underestimate their task completion times”.
- Newby-Clark, I. R., Ross, M., Buehler, R., Koehler, D. J. and Griffin, D. 2000. ”People focus on optimistic and disregard pessimistic scenarios while predicting their task completion times”.