225 – Why do we struggle to achieve capital expenditure targets?

By Lancing Farrell                                                                                                      1250 words

the planning fallacy.png

I was reaching into the archives to re-run a popular post on how councils fail to complete their targeted amount of capital works each year when a colleague pointed me in the direction of a recent podcast on Freakonomics Radio. The podcast, Here’s Why All Your Projects Are Always Late — and What to Do About It,  provides insights into the nature of the problem facing councils and provides some practical solutions.

You might want to start by reading that post from the archives.

In the podcast several key reasons for projects not being completed on time and within budget are discussed. Those most relevant to local government include the planning fallacy, optimism bias, overconfidence, and strategic misrepresentation.

Let’s start with the planning fallacy.

There are a lot of reasons why that project you planned can take way longer than you anticipated, and cost way more. Outright fraud, for instance — the lying, cheating, and stealing familiar to just about anyone who’s ever had, say, a home renovation … There’s also downright incompetence; that’s hard to plan for. But today we’re talking about the planning fallacy, which was formally described a few decades ago by the psychologists Daniel Kahneman and Amos Tversky.

This quote sets the scene nicely. Lots of things can contribute to a project not being completed on time but our inability to accurately estimate the time required to complete a project sets it up for failure.

Roger Buehler, a professor of psychology at Wilfrid Laurier University says that people tend to focus too much on the unique aspects of their project and how they think that project will be delivered. He says this tends to oversimplify what is required and ignores the things that could go wrong and lead to delays. People plan to succeed and lock onto the best-case scenario. Understandably, they don’t plan to fail.

So the planning fallacy is a tendency to underestimate the time it will take to complete a project while knowing that similar projects have typically taken longer in the past. So it’s a combination of optimistic prediction about a particular case in the face of more general knowledge that would suggest otherwise.

The complete focus on success is optimism bias.

Councils are full of optimists. We like to think that tomorrow will be better than today or yesterday. Our political leaders must think so or they wouldn’t be elected. As we will see later, the political art of over-promising is probably necessary to capture people’s attention and get their commitment.

Tali Sharot, a cognitive neuroscientist at University College London, says that optimism bias may be a sort of evolutionary insurance policy against hopelessness and it is a reason for some of the astounding progress made by humans. Her experiments have shown that the brain tends to process positive information about the future more readily than negative information.

There are so many positive aspects to having an optimism bias. In fact, in our research we see that the people without an optimism bias tend, in most cases, to be slightly depressed at least, with severe depression being related to a pessimistic bias where people expect the future to be worse than it ends up being. So I mean it’s a good thing because it kind of drives us forward. It gives us motivation. It makes us explore different things. It’s related to better health — both physical and mental health — because if you expect positive things, then stress and anxiety is reduced. So that’s very good for both physical and mental health.

Katherine Milkman, an associate professor at the Wharton School of the University of Pennsylvania, says the planning fallacy is also linked to overconfidence – the tendency to think we will do things better than we will. She says we are overconfident for many reasons, including that it makes us feel better about ourselves and we are often rewarded for it.

Imagine two people walked into an interview and one of them says, “I’m going to be great at this job, I’m great at everything I do.” And the other person says, “I hope to be great at this job, I try to be great at everything I do, but sometimes I fail.” I think most of us would respond more positively to the person who says, “I’m going to be great.” And that is a lifetime of feedback we give people, where we’re rewarding them for overconfidence constantly.

This again, is a hallmark of councils. Our leaders are frequently elected or appointed for the promises they make, not their track record. The profiling used to recruit our CEOs ensures that they are people who are only ever successful.

This leads me to strategic misrepresentation, which is effectively lying or misleading people to get projects approved.

Bent Flyvbjerg, a professor at Oxford University’s Saïd Business School, says he has interviewed project planners who said that they deliberately misrepresented the benefit-cost analysis in business cases for projects. They wanted their projects to look good to increase their chances of getting approval.

This may strike you as intellectually dishonest, at the very least. But this strategy is endorsed by no less an authority than Danny Kahneman himself, who won a Nobel Prize for economics: If you realistically present to people what can be achieved in solving a problem, they will find that completely uninteresting. You can’t get anywhere without some degree of over-promising.

In addition to local government’s optimism, overconfidence, and attraction to success (and aversion to failure), we do tend to focus on political ‘right answers’ – whether they are right or not. When the political and leadership support for a project is obvious, everyone will look favourably on it and try to make it happen. I heard an experienced councillor say not to worry whether projects can be completed or not – “commit the funds, if they get spent, they get spent.” The main goal was to meet expectations.

So, what is the solution?

The main solution for local government is to use reference class forecasting to ‘normalise’ the project planning milestones through use of existing data and application of algorithms.

Yael Grushka-Cockayne teaches project management and decision-making at the University of Virginia’s Darden School of Business and says that when planning a specific project you should ignore that project.

Don’t think about it too much. Look back. Look back at all the projects you’ve done, all the projects that are similar to this new project X, and look historically at how well those projects performed in terms of their plan versus their actual. See how accurate you were, and then use that shift or use that uplift to adjust your new project that you’re about to start.

She says that tracking historical plans versus actuals is the fundamental first step in overcoming the planning fallacy. Tracking actual performance will raise the profile of the issue within the organisation and this, in the absence of anything more sophisticated, will by itself lead to improvement. Focussing on how long similar projects took, and using that data to estimate the time for your project, is called reference-class forecasting.

Katherine Milkman takes it a step further and suggests using algorithms to make forecasts.

That is exactly how we cure the planning fallacy. We use data instead of human judgment to make forecasts, and then we don’t have this problem anymore.

Measuring our own performance, or better still the performance of many councils in completing the same type of projects, would provide the reference class needed for forecasting.