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Choiceology: Season 3 Episode 6

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Why do we forget the lessons of past projects and underestimate the time, costs and risks of future actions?

If you’ve ever been through a home renovation, you know that it often takes more time or more money (or both!) than the contractor’s original estimate. But why is that? Experienced contractors renovate homes all the time. And yet they still regularly face delays and cost overruns.

In this episode of Choiceology with Katy Milkman, we explore a tendency people have to be overly optimistic about what they can accomplish in a set period of time—starting with a story of the phenomenon playing out on a massive scale.

The International Space Station (ISS) is a marvel of human ingenuity. It’s the largest manned object ever put into space. It orbits the earth every 90 minutes. It contains 8 miles of wire and is the third brightest object in the night sky. At a cost of well over $100 billion, it is also the most expensive object ever built. At the beginning of the project, however, it was expected to cost only a small fraction of that amount.

  • Robert Godwin has written extensively about the ISS. He explains the tumultuous history of the project, which started as a relatively modest American plan to succeed the Skylab station and eventually becoming a massive international collaboration hampered by political and technical challenges. Godwin is the co-author of the book Outpost in Orbit: A Pictorial & Verbal History of the International Space Station.
  • Astronaut Ken Bowersox was aboard the ISS during one of the most difficult periods of the project. He recounts the harrowing details of an emergency return trip to Earth after tragedy struck the American shuttle program.

In hindsight, it’s easy to see how a project that involves international cooperation and cutting-edge technology could run into delays and cost overruns. However, this tendency toward over-optimism manifests itself even in simple projects back on Earth.

  • As an experiment, we had several volunteers sit down, separately, with a child’s engineering toy. We asked them to estimate how long it would take to build a simple machine, using the included step-by-step instructions. The difference between their estimates and reality is telling. And this is a toy designed for 8-year-olds!
  • Bradley Staats of the University of North Carolina’s Kenan-Flagler Business School joins Katy to discuss the mechanics of this bias and to give examples of a number of different domains where this tendency can cause problems. He also introduces some simple strategies to help reduce forecasting errors.
  • Finally, Katy expands on some of those strategies in order to help you make better estimates around the time, effort and expense required to meet your goals.

Choiceology is an original podcast from Charles Schwab.

If you enjoy the show, please leave a rating or review on Apple Podcasts.

Click to show the transcript

Katy Milkman: Here’s a scenario, and maybe some of this will sound familiar. Let’s say you’re working on a small project with a tight deadline. You’ve been plugging away at it all day, though you’re not as far along as you’d hoped. You figure you can get up early and finish the project tomorrow morning before the kids get up. Then the morning comes. …

Speaker 2: Now that warm front will bring some heavy showers this morning and throughout the day, so don’t forget your umbrella on your way out the door.

Katy Milkman: You’re tired. You hit the snooze button a couple of times, but still you manage to get up early enough to get cracking on that project. You fire up the coffee maker, but you forgot to get beans yesterday. You dig around for something caffeinated. Tea it is. Now, where’s that kettle? As you’re sitting down at your desk you remember your son has soccer practice this morning. It’s all right. Your spouse will drop him off on the way to work.

Speaker 2: Now turning to your morning commute, that accident on the I-80 means that traffic is crawling this morning. Crews are on their way back.

Katy Milkman: OK. Traffic is bad this morning. You’ll have to leave a little earlier than usual, but you’ve still got time. You dive into your project. Right. The dog needs to be walked. And just as you get back into the house …

Speaker 3: Hey, honey, do you mind taking the kids into school this morning? I’ve got my class. Remember?

Katy Milkman: Before you know it, it’s 7:45. You’re corralling the kids and all the homework that needed to be checked yesterday, and now it’s 8 a.m. You’re going to be late for work. You haven’t even touched the project that’s due today. How did this happen? It’s not like you don’t know how hectic mornings can be, so why did you expect this morning to be any different?

Today we’re going to dig into the reasons why the best-laid plans don’t always track with reality, at home, at work or in outer space.

I’m Katy Milkman, and this is Choiceology, an original podcast from Charles Schwab. It’s a show about the subtle forces that can push you in one direction or another when you’re trying to make decisions, often without you even realizing it. We bring you high stake stories that illustrate these hidden forces that can shift decisions, and then we dive into the science behind our occasionally irrational behavior. Finally, we try to give you some tools to fight back against behavioral traps, all to help you avoid costly mistakes.

Ken Bowersox: My very first launch to orbit was on STS-50. That was back in 1992, so I can remember the solid rocket boosters lighting, seeing this bright glow outside the windows, a golden glow from the flames of the boosters, and then a push in my back as we lifted off the pad.

Katy Milkman: That’s NASA astronaut Ken Bowersox. We’re going to hear more from him in a bit. But first, some context on the project we’re looking at, the International Space Station.

Robert Godwin: Well, there were space station meetings as early as 1951 if you can believe that.

Katy Milkman: This is Robert Godwin. He’s written extensively on the history of space flight, including the book Outpost in Orbit, which he co-authored, about the International Space Station.

Robert Godwin: The first real NASA gathering of the Space Station Committee happened in 1960, so that tends to be way earlier than most people realize. Of course, it wasn’t until President Reagan in the early 1980s announced that the United States was going to build a space station that people really became aware of it.

Ronald Reagan: We can follow our dreams to distant stars living and working in space for peaceful economic and scientific gain. Tonight I am directing NASA to develop a permanently manned space station and to do it within a decade.

Katy Milkman: That was President Ronald Reagan from his 1984 State of the Union address. It was official. America had an aspirational plan to build a low Earth orbit space station. It was to be called Freedom. But this wasn’t NASA’s first space station. Skylab had previously launched into orbit on May 14th of 1973.

Robert Godwin: Skylab was a good testing ground, and it was what was called a single-launch space station, where they could put it up with one rocket and then man it for months at a time.

Katy Milkman: The entire Skylab was launched on one rocket. The new space station was going to be a larger modular station assembled over multiple missions by an international consortium. That consortium would eventually include the Soviet Union. The Soviets also had prior experience with space stations. Their Salyut program launched seven space stations into orbit between 1971 and 1991, and they launched the core module of the Mir space station in February of 1986. Six additional modules for Mir were sent into orbit over the next decade. So while the new space station would be an ambitious and complex undertaking, it wasn’t unprecedented.

However, international cooperation on this type of project was certainly unique.

Robert Godwin: One of the interesting stories about the beginning of the international cooperation on this space station was that the engineers in the Soviet Union who had an enormous amount of experience with space stations, their system was such that they would keep their plans and ideas to themselves.

Katy Milkman: The Soviet engineers were hesitant to share all of their expertise for fear of being made redundant on the project. So they only shared information with a select few American engineers.

Robert Godwin: They literally took the Americans into a closet, like a small storage room in Moscow, and pulled out their plans for their advanced space station designs, and they were on big rolled up pieces of paper where only certain people could get to them so that they were not making themselves redundant.

Katy Milkman: So cooperation was going to be more challenging than expected, but planning moved ahead for several years. The project was hampered by delays and cost overruns, as well as the collapse of the Soviet Union in 1991. But it was the arrival of the Clinton administration in 1992 that presented the first major challenge to the project.

Robert Godwin: President Clinton was elected, and he’d run on a platform of cutting back budgets and so on. NASA were told that they had 10 weeks to completely redesign the space station, which had nine years’ work into it at that point. So nine years of work went out the window, and they were given two and a half months to come up with something else.

Katy Milkman: Two and a half months. NASA and their international partners scrambled to put together a more cost-effective approach. They began a new partnership with the Russian Federation that would combine the Mir and the Freedom programs. But even with these measures, it remained a challenge to design and build space infrastructure on time and on budget.

Robert Godwin: One of the most expensive problems on the ground was the construction of the first Node One module, which was being built in the United States. When they pressurized it, they realized that there was a fundamental design flaw in the system. They had to basically start building it from scratch again, so that pushed the timeline back immediately by at least a year.

Katy Milkman: There were other technical problems and setbacks too. There were political and language challenges in dealing with the international partners, Russia, Japan, Canada and the 11 member nations of the European Space Agency. But finally …

Robert Godwin: The very first module to be launched to the International Space Station was the Zarya, which was the Russian power supply module, which was launched in 1998.

Katy Milkman: On the surface, the American space shuttle program seemed ideally suited to service the construction of this multistage modular space station. Shuttles were reusable and substantially less expensive on a per-mission basis than the previously canceled Apollo rocket program. But Robert Godwin argues that this may not have been the most cost-effective approach after all.

Robert Godwin: It seems to me that they could have done this a whole lot cheaper, quicker and easier if they hadn’t canceled the Saturn V rocket, which was the giant booster that sent men to the moon. That thing had such an enormous lifting power it could’ve launched the entire mass of the space station in probably three launches, maybe two, as opposed to however many it’s been now. I think it was 35 or something that it took to actually build it with the shuttle.

Katy Milkman: So ironically, using the shuttle would be more expensive in the long run. And because more flights were required, there were more opportunities for things to go wrong.

Ken Bowersox: I’m Ken Bowersox, retired NASA astronaut. Worked for about 19 years at NASA. I flew five times in space, four different space shuttle missions, and then on my fifth mission I got to live aboard the International Space Station during Expedition 6.

Katy Milkman: Ken has spent roughly seven months in space, four shuttle flights that were a week and a half to two weeks long, and a five and a half month stay aboard the space station.

Ken Bowersox: Part of our job was to do science experiments while we were there, either on ourselves or on other people or with different apparatus that was available on board the space station.

Katy Milkman: Ken was also involved in delivering and installing an addition to the station.

Ken Bowersox: We also brought a major segment, one of the truss segments that holds the solar arrays in the payload bay of the space shuttle that we arrived in. We helped to outfit that while we were there.

Katy Milkman: Time aboard the station is very regimented. Astronauts would teleconference regularly with ground crew to coordinate tasks and operations. There’s one meeting Ken will never forget.

Ken Bowersox: Well, back then on the International Space Station, every Saturday there would be a time when the crew would tag up with the ground control team in sort of a preparatory conference for the week ahead. On this day when it came time to do that conference, we didn’t hear anything from the ground, and that was weird. So I called the ground and said, “Hey, are we going to do the conference today?” And they said, “Standby.” All we heard was a standby, which was very different.

A little while later the head of the Johnson Space Center, General Jefferson Howe, came on the radio and said, “Hey, guys, I got to tell you something. We’ve lost Columbia.” We were all in shock right when we heard that.

George W. Bush: My fellow Americans, this day has brought terrible news and great sadness to our country. At 9 o’clock this morning mission control in Houston lost contact with our space shuttle Columbia.

Katy Milkman: On February 1st of 2003, space shuttle Columbia disintegrated as it reentered Earth’s atmosphere. All seven crew members aboard were killed.

Ken Bowersox: First you think about the people that were lost and what they may have experienced, and then often you put yourself in their place, thinking, “Well, when would that happen to me?” After the loss of STS-107, there was concern that another accident might happen if we were to launch another shuttle.

Katy Milkman: NASA would postpone the shuttle program while it studied the disaster and implemented new safety protocols. But there were still three astronauts orbiting the Earth at 17,000 miles an hour. They needed a way home.

Ken Bowersox: And so the Russian partners and the folks in the U.S. came together and decided that it would be OK for our crew to bring home our emergency vehicle, the Soyuz TMA-1.

Katy Milkman: Ken Bowersox and the rest of the crew on Expedition VI would return to Earth in the Soyuz re-entry module that was affixed to the space station for this type of emergency. They made a harrowing return in what’s called a ballistic entry.

Ken Bowersox: The bottom line is on a ballistic entry you come in on a steeper angle, and you decelerate faster. So what that means is you end up landing short of the target. You don’t make it all the way to the target. As we were coming down, we eventually went below the radio horizon, and we couldn’t talk to them anymore. Everybody on the ground was confused. They’d been able to talk to us, and then all of a sudden they couldn’t. They didn’t realize where we were. All our folks in mission control, they thought everything was normal, and then suddenly they couldn’t talk to us, and that was kind of unsettling.

And then the chute opened. Thankfully for us, the chute came out, everything was just great, and we landed at home in Kazakhstan. The thought of being on Columbia hit me a lot later after we’d been back from the space station for a few months. I got a chance to go and look at the debris that was collected from the investigative effort for the accident, and I got to see the window that the commander looks out of on entry. Just being there and knowing I’d sat behind that window frame before and seeing the damage from the heat and imagining what it was like was just … oh gosh, it just stopped me in my tracks.

Katy Milkman: This is all a reminder of the incredible complexity and danger of space travel and of the bravery of the astronauts involved. Losing the space shuttle Columbia was the most terrible thing that had happened during the course of building this International Space Station. But it was not a completely unforeseen possibility. NASA had experienced the Challenger space shuttle disaster in 1986. So they knew shuttle losses were a real risk. Though everyone involved recognized the risk of a shuttle failure, the Columbia tragedy had a massive impact on the space station project.

Here’s Robert Godwin again.

Robert Godwin: Losing the Columbia actually delayed launches entirely for a couple of years. Nobody was going to launch anything until they’d done a complete breakdown of exactly what happened and tried to figure it out. That meant going and picking up all the pieces.

Katy Milkman: The original timeline for constructing the International Space Station had shuttles going up nearly every four weeks. Now, after a two-year delay, the shuttle would only launch two to three times per year.

Robert Godwin: Of course that pushed back the timeline for the space station more than anything.

Katy Milkman: That original monthly launch schedule was an incredibly ambitious target.

Robert Godwin: That ambition, that go fever, really ended up causing these terrible accidents to happen and people to lose their lives, which then delayed the entire program and caused the International Space Station to cost more money and take longer than was predicted.

Katy Milkman: The Columbia disaster drove costs on the already mind bogglingly expensive project even higher, as increased safety standards meant more complex paper trails, additional layers of equipment redundancy and substantially longer project timelines. Of course, safety should be paramount, and space exploration is incredibly valuable to humanity, but it’s interesting to compare the planned costs and schedule to what actually happened.

Robert Godwin: When they first proposed the space station when President Reagan announced that they were going to build it, they thought at the time that they might be able to do this for maybe 10 to 15 billion dollars. Of course, by the time it was actually completed, it’s in the much more than that, tens of billions of dollars, if not 100 billion dollars. They were hoping to actually complete the space station by 2005, and they didn’t actually complete it until the last shuttle flight in 2011.

Katy Milkman: Six years behind schedule. That’s not even the original schedule. And tens of billions of dollars over budget. It’s the most expensive single structure ever built and the most complex. Despite the cost, it’s a remarkable achievement.

Robert Godwin: Today the thing with its solar panels deployed, it’s the size of a football field now. There an entire Japanese laboratory onboard. There’s a European laboratory. There are all of these docking modules that connect everything together. There’s this inflatable module that was launched to be tested out for a space hotel. It’s flying in this really tough environment in low Earth orbit and radiation hitting it all the time constantly subject to the potential hazards of meteors and so forth. Yet it’s been done on this cooperation agreement between all of these different countries, all people speaking different languages, having to make different technologies work together. It is just an incredible accomplishment.

Katy Milkman: Rob Godwin is the coauthor of Outpost in Orbit. Ken Bowersox is a veteran of five space shuttle launches and an extended stay aboard the International Space Station. I have links in the show notes and at Schwab.com/podcast, where you’ll also be able to find all of our past episodes, transcripts and bonus content.

What I want to explore from this story is the wildly inaccurate estimates of what the International Space Station would cost and how long it would take to build. In a 2001 report to the NASA Advisory Council, the cost of construction had grown from an original estimate of $17.4 billion to over $30 billion. The latest construction cost estimate hovers at around $100 billion. Adjusted for inflation, that’s about $75 billion in cost overruns. That’s pretty mind-boggling.

In hindsight, it’s easy to point to all the places where NASA and its partners made mistakes. It’s easy to see why they blew through their budgets and timelines and to say, “They should’ve known better.” But this tendency to be overoptimistic about time and money doesn’t just happen with engineers on large and complex projects; it affects projects of pretty much any kind.

Katy Milkman: I want to bring you back to Earth with a simpler demonstration. We had a couple of people sit down with a construction set made for kids, and we asked them to estimate how long it would take them to complete the assembly of a toy. They had detailed instructions, which included illustrations of the completed project. Notice their estimates as you listen.

Speaker 9: You’re making me build stuff?

Speaker 10: Do I get to play with toys? Oh, yeah.

Speaker 11: Today what we’re doing is we’re having you play with an educational building/engineering toy. So we’re going to get you to build a blender out of all these gears and rods and connectors.

Speaker 10: All right.

Speaker 9: It looks like there are eight steps, but each step has a variety of things that have to come together.

Speaker 11: How long do you think it’s going to take you to build this blender?

Speaker 10: This is going to be interesting. I think it’s going to take me seven minutes.

Speaker 9: It is going to take me 10 minutes.

Speaker 11: All right. I’m going to set a timer, so you can go ahead and get started.

Speaker 9: Twelve of these rods.

Speaker 10: How old are kids supposed to be for this?

Speaker 11: I believe the recommended age is eight years old and up.

Speaker 10: Yeah.

Speaker 11: How are you feeling about your time quote so far?

Speaker 9: Oh, I feel like I have undershot it, but I’m optimistic that I’m going to get really close to it.

Speaker 10: This little tiny one is not fitting quite right.

Speaker 11: What step are you on now?

Speaker 10: I’m on one. I feel like it looks wrong. We’ll find it, won’t we?

Speaker 9: Well, this is just not going to happen. Has it been 10 minutes?

Speaker 10: I think our timer is going off now. Does it mean I have to stop?

Speaker 11: So let’s review. How far did you get?

Speaker 10: I got to step four of eight.

Speaker 9: I got three steps in out of eight.

Speaker 11: So why did you think you could do it in 10 minutes?

Speaker 9: Because I thought just looking at it really quickly it looked like the pieces were going to come together real quick.

Speaker 11: If you could go back knowing how long it took you to get to where you are in the building process, how long would you have estimated?

Speaker 9: It would take at least half an hour, I think.

Speaker 10: If I want to be safe, I’d say maybe like 20 minutes.

Speaker 11: Are you surprised by how little you got done in the 10 minutes that you thought it was going to take you to complete this?

Speaker 9: In retrospect, no. I realize how dumb I was to say 10 minutes is all I would need to do this.

Speaker 10: I always underestimate how long it takes me to do stuff.

Speaker 11: And why do you think that is? Why do you do that?

Speaker 10: Because I think I can do more than I can.

Katy Milkman: OK. So this project was not exactly rocket science—or space station science. But notice that our participants did exactly the same thing that the International Space Station engineers did, just on a smaller scale. They substantially underestimated how long it would take to complete a project. This isn’t just a staged example. This phenomenon has been documented time and again across dozens, if not hundreds, of research studies. It’s the same thing that burned our imaginary character at the start of the show. Humans tend to be overly optimistic about the time, energy, effort, coordination and expense it will take to complete a task or a project. They tend to ignore the what-if’s, the unforeseen, the unimagined, the unconsidered aspects of a project.

College students consistently underestimate how long it will take to finish a term paper. Construction contractors often underestimate how long a renovation will take. Businesses, governments, nonprofits are all prone to miss the mark when estimating schedules. This happens even when we aren’t rewarded for shaving costs and have every reason to make accurate estimates. But why? Research points to errors in a way we predict the future.

In the late 1970s Amos Tversky and Daniel Kahneman proposed a behavioral bias they called the planning fallacy. Their work was later extended by Kahneman and his colleague Dan Lovallo, and the bias was defined as the tendency to underestimate the time, costs and risks of future actions and at the same time overestimate the benefits of the same actions.

I’ve invited Bradley Staats, a professor at the University of North Carolina’s Kenan-Flagler Business School to help me get into the details of this bias and how to avoid falling prey to it.

Katy Milkman: Hey, Brad. Thanks so much for joining me.

Bradley Staats: Of course, Katy, glad to be here today.

Katy Milkman: OK. So let’s start out by talking about what the planning fallacy is. Could you describe for us what is this bias, and where does it come from?

Bradley Staats: Sure. With the planning fallacy we’re talking about kind of an optimism bias, but it’s not just optimism; it’s that we underestimate how long a future task is going to take even when we have knowledge that past events took longer than planned. It’s not just that we’re overly optimistic. We should know better, and yet we don’t.

Katy Milkman: What causes this? Why is it that we should know better, we have the data available from past events, and then we keep messing up?

Bradley Staats: That’s a great question. It’s back to this challenge of kind of an inside-outside view, that we have our own experience, and we really get caught up in that experience, and we don’t think about the broader picture. It shows up in a few different ways. One is that kind of we focus on just that one activity or that project. Think about kind of taking home work for the weekend. Instead of recognizing that we have to make dinner or we have to go to a kid’s baseball game. We just think about the work itself. Yes, I’ll get all of this done, 10 pages written. Instead we get one, even though we know that’s all we ever get written.

We also kind of tend not to really draw on our own experience. When we’re estimating how long something’s going to take, we look forward. Ironically, we should be looking backwards. We should be thinking about, what did things look like in the past? I think the final point is one of attribution. This challenge of, as we’re trying to figure out things, how much of it was me versus the situation. So even if we think about those prior events, we say, “Well, they were special. They were unlucky,” or “I won’t have that same problem.” We kind of discount and throw it away.

Katy Milkman: Could you give an example of a time that the planning fallacy has affected your own judgment?

Bradley Staats: I’ll give two that are related. We have a friend and coauthor named Craig Fox. When we were talking to him about this one time, he brought up how he had to have some renovation work done. He got an estimate from a contractor. At the end of that he was wise enough to ask the contractor, “Well, how often are you right?” The guy kind of looked up to the sky and thought about it and then said, “Well, never.” Yet, Craig still went on with the work.

Fast forward several years. We had our own big home improvement project that we asked how long it would take. He came back to us, the contractor, with a six-month estimate. Sadly, not only did I fail to kind of draw on Craig’s lesson of asking him for some sort of range, we then kind of proceeded as if six months was actually how long it was going to take, knowing full well, or at least we should’ve, that it would blow through that limit. It ended up being kind of nine or ten months over budget as well in the whole process.

Katy Milkman: I love that you did a home contracting example. Those are all too familiar.

Bradley Staats: Exactly.

Katy Milkman: Let’s talk about research. Could you tell me a little bit about some of the research studies that you find most compelling on the planning fallacy?

Bradley Staats: The initial kind of introduction of this which was Kahneman and Tversky in 1979, what’s interesting is they actually introduced it with a simple anecdote, a story of one of them on a curriculum committee for a high school curriculum. In that, they were estimating how long the project would take. Kind of everyone on the committee said a year and a half to two and a half years. Then one of them was smart enough to say, “Well, hold on. Have we ever done something like this before?” And kind of the expert said, “Well, yes. Forty percent of the time it never finishes. When it actually finishes, it’s seven to ten years.” And in their case it ended up taking about eight years, so they fell kind of right in the middle of that distribution. That really sets it up nicely.

In terms of other researchers who’ve been active, Roger Buehler and Dale Griffin have been particularly prolific in documenting the planning fallacy and really highlighting how it shows up again and again.

One other project I’d highlight that I found really interesting was thinking about kind of individual versus group decision-making. We might think that a group could help regulate us, but what it actually found was when they brought the group together, the group became even more optimistic as it kind of moved towards the kind of improved guesses or faster guesses as, “No, that won’t be a problem here.” So the bias even extended compared to just having individuals do things by themselves.

Katy Milkman: That’s super interesting. Brad, of course, since we’ve worked on one project together related to the planning fallacy I can’t resist the temptation to ask you to talk a little bit about that.

Bradley Staats: Absolutely. So we looked at this idea of kind of what we called the team-scaling fallacy, this challenge of we increasingly underestimate task completion time as the team size grows. Really the project came from an observation by Fred Brooks, chief architect of the IBM System/360 project, who wrote the book The Mythical Man-Month. In that book he has something known as Brooks’ Law where he says, “Adding people to a late project makes it later.” The key idea that we had was that when we look at the impact of bigger teams, we think a lot about the gains from adding people, but we don’t think about the coordination losses that we’re going to incur. It’s kind of a group planning fallacy basically.

In our study we actually took a couple of different approaches to understand this. In the research lab we had individuals estimate how long a task would take for teams of size two and teams of size four. What we did is we had folks build a Lego spaceship of all things, so it was very well structured. Then we had the data on how long it took. While the four-person teams worked quicker, if you looked at the total person-minutes that they put into the project, not surprisingly it was higher. They didn’t finish in 10 minutes versus 20. It was something in between.

Then we had people estimate this. How long did they think a four-person team would take in that total person-minutes compared to the two-person? What we see is that while they adjusted a little bit, they didn’t adjust nearly enough. I think it’s an interesting element that the planning fallacy is not just looking at a simple task—how long is this going to take me?—but as we expand it out and we think about kind of other dimensions, in this case team size, the real challenges that introduces.

Katy Milkman: Brad, this is obviously a really pernicious bias. What can we do to help people avoid falling prey to it?

Bradley Staats: I think there are at least four things that we can think about doing. The first, and one of the oldest, is looking at unpacking the work. If we take whatever it is we’re estimating, break it down into smaller subcomponents. This really helps us focus on each of those individual pieces, as well as how they fit together. The second thing is using other people, but using them in a productive manner. There’s a chance when we use a group that we can kind of bias each other and make it worse. Instead we can bounce these ideas off of someone. When we share with them how long we think it’s going to take, we can ask them, “What’s wrong with this forecast? Why might I be too optimistic in how I’m approaching it?”

The third is trying to explicitly call out how long those other classes have taken and those other projects have taken. This is sometimes known as reference class forecasting. So the idea is that you come up with the distribution of comparable projects, you look at how long from quickest to slowest other things have taken, and then you justify where you are going to sit within that distribution.

The nice part of that is if you show it typically takes, say it’s a big project, one year to four years, and we think we’re going to do it in nine months, well immediately you’ve got a problem. If you think, we’ll be the 12-month, the one-year project, you have to justify, why are you better than 95% of the other projects?

The last thing that I would say is you really want to identify the challenges. What are the things that are going to get in the way? That’s what we often miss. With planning fallacy even though we know others face those challenges, we won’t.

Katy Milkman: I’m thinking about your home renovation project where you mis-estimated how long it would take. I’m wondering if you could use that as an example and sort of walk a listener through how you would use those four solutions to improve your own judgment on the forecasting of how long your home renovation project would take.

Bradley Staats: I think a great way to talk about how we might do better is to go back to our addition of a basement at our house. There when the contractor came back to us with kind of the six-month estimate, we could’ve started first by unpacking the work, getting him to share, “OK, how long is each of these pieces going to take?” In that unpacking we likely would’ve helped him to recognize that he was being overly optimistic, and certainly we would’ve helped ourselves.

Second, is that we should’ve gone and talked to others. It’s not hard at a cocktail party to get folks to tell you their horror stories of renovations. I’ve yet to meet the person who finished a month early and 20% under budget. That would’ve helped us kind of adjust that timing up realizing it wasn’t going to be six months, more like eight, nine, 12, 15, et cetera.

Related to that is the idea of reference class forecasting. That sitting down and looking at comparable projects and understanding either if you have the detail, how long did these projects take, or if you don’t have that detail, you could at least look at how much did they run over by. So what should we realistically be kind of adding in as a buffer?

Then the fourth thing is being a little bit explicit around what are the different challenges. What are the things that could get in the way, and as you start to think through that you realize, “Oh, the permitting process takes longer. Oh, the subcontractor is going to have this problem.” In our case, I think all of those would’ve pushed us up at least 50% in the six-month basement project.

Katy Milkman: I love that. Brad, thank you so much for coming on the show. I really appreciate it.

Bradley Staats: Absolutely, Katy. It’s my pleasure.

Katy Milkman: Brad Staats is a professor of operations at the Kenan-Flagler Business School at the University of North Carolina. He’s also the author of the book Never Stop Learning: Stay Relevant, Reinvent Yourself, and Thrive. I’ve got a link in the show notes and at Schwab.com/podcast.

The planning fallacy and the overconfidence that drives it can affect many of your financial decisions, like putting together a realistic retirement plan. That’s why Schwab also produces the podcast, Financial Decoder. It’s designed for people who want to make better decisions with their money. Mark Riepe hosts the show. He’s the head of the Schwab Center for Financial Research. Mark and his guests dissect the financial choices you might be facing, and they offer tips to mitigate the impact of biases on your financial life.

You can find it at Schwab.com/FinancialDecoder or wherever you listen to podcasts. One of the antidotes to the planning fallacy that Brad Staats mentioned, but that we didn’t include in the interview, was to use what psychologist Gary Klein calls a premortem. Maybe you’ve heard of a postmortem in medicine. It’s a process that allows health professionals to assess what caused a patient’s death. The thing is, everyone benefits except the patient. According to Klein, a premortem comes at the beginning of a project rather than at the end, so that the project can be improved rather than autopsied.

The premortem requires a funny assumption about the patient—your project. It requires you to imagine that it’s already failed. Then you have to ask, “What most likely went wrong?” Your task and the task of your team members is then to generate plausible reasons for the project’s failure. With this hypothetical but realistic information, you can make better plans that account for more variables. And you’re less likely to exhibit the planning fallacy, or at least you’ll hopefully be slightly less overoptimistic about how quickly you can complete the project in question.

I hope you’ve enjoyed this season of Choiceology. We’ll be on a bit of a break for the summer, but we’ll be back with new episodes on September 2nd—assuming everything goes according to our very-well-thought-out plan. So stay tuned and stay subscribed. If you’ve enjoyed the show, tell a friend or colleague and leave us a review on Apple Podcasts and other platforms. Reviews are always much appreciated.

If you liked this episode, you might enjoy revisiting our very first episode of the show on overconfidence, a pernicious bias that contributes immensely to the planning fallacy. I’m Katy Milkman. Thanks for listening. Talk to you again in September.

Speaker 13: For important disclosures, see the show notes or visit Schwab.com/podcast.

Important Disclosures

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