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The things we do: The economic, social, and personal costs of optimism

Roxanne Bauer's picture

Construction worker for the Panama Canal expansion projectIt is now the second week of 2016 and many people are working (or struggling) to follow through on their New Year’s resolutions. Whether they have decided to run a marathon, travel more, or save money, many people endeavor to create positive, new habits while shedding existing habits they think are less positive.  These resolutions, though, tend to last one or two months, fading into the backgrounds of their consciousness as spring arrives. 
 
It’s a typical combination of the planning fallacy, unrealistic optimism, and a bit of self-regulatory failure.
 
And this sort of challenge is not specific to New Year’s resolutions or even to issues pertaining to individuals.  City councils frequently draw up budgets that are too lean, road construction frequently lasts much longer than expected, and advances in technology often require much more investment than planners expect. So what’s at work here?  Why is it that people have a hard time judging the amount of time, energy, and resources that a project will take?

Planning Fallacy
 
In 1979, Daniel Kahneman and Amos Tversky famously presented the planning fallacy as a phenomenon in which individuals’ underestimate how much time will be needed to complete a future task, regardless of their experience that similar tasks they have attempted in the past have taken longer to complete than they had planned.  Most often, individuals’ predictions of task completion times are more optimistic than the actual time needed to complete the tasks.  They will overestimate the amount of work they can complete in a day, misjudge their potential energy or motivation in the future to exercise, or underestimate the factors that would inhibit their progress, like traffic, fatigue, or interpersonal conflict.
 
Zukier (1986) suggested that for many judgments and forecasts, people adopt a "narrative mode" of thinking that is concerned with sequential relationships among events, action-related structuring, and the integration of available information into a connected narrative.  Individuals focus on the attainment of the goal and construct plans or steps they will take to reach that goal- this is the narrative of how they will accomplish the task.  They tend to ignore the surrounding context or their past experiences in developing the action plan.  While creating a chronological action plan can be helpful, it’s also useful to consider other similar tasks that the individual has attained to see what held them back, what propelled them forward, and how they can use their experiences to do better on the current task. 

As Tim Harford pointed out in a recent edition of the Undercover economist, businesses have found ways to exploit our vulnerability to the planning fallacy.  Rebates are, perhaps, the best example of this. A rebate is a deal by which customers can get a price break from the normal or posted price of a product by exerting some effort, generally in the form of mailing forms along with proof of purchase to the manufacturer. Rebates work on the bet that most people, at the time of purchase, will plan to fill out the forms but will later forget or decide it’s too much work.  Of course, as many readers know from personal experience, manufacturers also make the rebate redemption process more or less onerous for customers to discourage people from redeeming their rebates.    
 
The planning fallacy is also quite evident in group work and public projects. The Sydney Opera House was originally estimated to cost US$7 million with a completion date of 26 January 1963. In the end, the famous landmark was completed ten years late and 1,457% over budget in real terms. Similarly, the Channel Tunnel, which connects the UK and France, was completed with an 80% cost overrun.

Optimism bias

The planning fallacy results from optimism bias- the belief an individual or group may hold that that a project can be completed within overly confident parameters or that they are less at risk of experiencing a negative event compared to others. People and groups reveal all kinds of optimism bias, from discounting the risk of being a crime victim, believing they are less likely to contract a disease than others, or thinking that they can more easily judge when the next stock market bump (or crash) will occur. 
 
Olympic Rings at the front of the London Aquatics Centre;Indeed, some researchers have argued that optimism bias contributed to the 2008 global financial crisis as it blurred the assessments of the private sector, government officials, rating agencies and financial analysts who expected the market to continue its upward climb.  Others have argued it is one reason why in the past 50 years each Olympic Games has had cost overruns.
 
Researchers have looked into what causes optimism bias, including its basis in neurology, how it relates to cognitive mechanisms like self enhancement and mood. From this research one thing seems to be clear: optimism bias is both one of your brain’s best tricks and one of its worst.  It makes people overly optimistic, leading them to avoid the dentist and gamble their savings away, but also provides hope to re-marry after divorce, rebuild after an earthquake, and take aggressive medication— even when experience or statistics are not in their favor.

Interestingly, this only affects predictions about one's own tasks or abilities; when people predict a task for others, the reverse occurs, and they overestimate the time or energy needed.  The British Government has recognized the tendency for project appraisers to be excessively optimistic in their plans and developed the Green Book, which among other tips suggests that “adjustments be based on data from past projects or similar projects elsewhere, and adjusted for the unique characteristics of the project in hand” to alleviate some of the effect of the optimism bias.

So, be brave, and go forth! 

Following through on New Year’s resolutions, developing project plans, and anticipating risks is not as much about motivation or discipline as it about thinking clearly.  To be successful, we need to realistic about how much time/energy/resources a goal will take and, conversely, how little of those inputs we will have to complete it. 

Additionally, if you work in communication, understanding people’s tendency to be overly optimistic reveals opportunities to engage them for good.  In most cases, it will be more difficult to convince people of the downsides of their behavior as opposed to supporting their naturally positive visions for their future. Yet, when possible, it’s beneficial to speak directly to people’s strong tendency to underestimate how taxing a goal or project will be.

Because, at the end of the day, as Buehler, Griffin, and Ross state in their paper, “The planning fallacy is an important topic of study for both applied and theoretical reasons. Inaccurate completion estimates can have economic, social, and personal costs.”


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Photograph of Construction worker for the Panama Canal expansion project by Gerardo Pesantez / World Bank
Photograph of Olympic rings in front of London Aquatics Centre by Daniel Coomber via Flickr