Planning Fallacy and the London Olympics

In his bestseller Thinking Fast and Slow, Daniel Kahneman discusses many common cognitive and decision-making errors. One that I’m certainly familiar with is called the “planning fallacy.”

Almost everyone, Kahneman says, creates forecasts that “are unrealistically close to best-case scenarios and could be improved by consulting the statistics of similar cases.” He uses as an example kitchen renovation projects. The average estimate for the job is about $18,000, and the average final cost is close to $38,000. But no one ever begins the renovation thinking their project will have those kinds of cost over-runs.

It’s not surprising that ordinary people fall prey to this common decision-making error, but you’d think people who are professional planners would know better. In the August 2012 Harper’s Index, there’s a perfect example of the planning fallacy on a large scale:

Cost of staging the 2012 London Olympics Games as estimated by the British government in 2003: $3.7 billion

Cost as currently estimated by the British government: $14.6 billion

As estimated by an independent study: $37 billion

When is the last time you heard of a large government or corporate project that didn’t involve huge cost overruns? You’d think the people involved in the planning of such projects would study similar projects, learn from the mistakes others have made, and plan accordingly. But it seems like we are all afflicted with the same prejudice: I’m different and I won’t fall prey to the same problems other people do.

What word describes the Olympics cost over-run better than “insane”? This is the confusion of subjective opinion with objective fact (our definition of insane) brought into the realm of public policy. (Not to mention the insanity of spending this kind of money on a spectacle with the austerity budget now in place in Britain.)