The Planning Fallacy

Jared Spool’s Beans and Noses caused quite a stir when it re-surfaced and worked it’s way around our office. It’s the perfect metaphor to describe the consultant’s dilemma when working with big clients:

The idea is blindingly simple, actually. Every so often, you’ll run into someone with beans who has, for no good reason, decided to put them up their own nose. Way up there. In a place where beans should not go.

What do you do?

Lean Enterprise: How High Performance Organizations Innovate at Scale takes a more diplomatic approach framing it as the planning fallacy:

Due to a cognitive bias known as the planning fallacy, executives tend to “make decisions based on delusional optimism rather than on a rational weighing of gains, losses, and probabilities. They overestimate benefits and underestimate costs. They spin scenarios of success while overlooking the potential for mistakes and miscalculations. As a result, they pursue initiatives that are unlikely to come in on budget or on time or to deliver the expected returns — or even to be completed.”

The planning fallacy is a means of managing uncertainty by spinning ‘scenarios of success’ at the outset of a project. It’s easy to fall for this delusion because we don’t like thinking about failure, or admitting that we may be acting before having explored different options sufficiently. What can we do about this? The Lean Startup process can help:

The Lean Startup process being relatively cheap, in an enterprise context we can pursue multiple possible business models simultaneously using the Principle of Optionality.

The Principle of Optionality simply means that by investing limited amounts of time and money in small experiments we can investigate more ideas simultaneously:

…the principles of constraining time and resources, thus limiting downside, and building a minimum viable product to test your value hypothesis as soon as possible with real customers should be applied at the start of every endeavor.

The Principle of Optionality: building and testing minimum viable products simultaneously. Most will fail, but the probability of a big win increases. 1

All roads lead to a minimum viable product, and testing a minimum viable product with real customers is a rational means of weighing up the gains, losses, and probabilities when things are uncertain. It is the antidote to delusional optimism, and will increase the likelihood that beans end up in the ground.

  1. Diagram interpreted and redrawn from Lean Enterprise: How High Performance Organizations Innovate at Scale. Originally from Antifragile: Things that gain from Disorder by Nassim Nicolas Taleb.