Posts Tagged ‘planning fallacy’

Why the best-laid plans go awry

August 25, 2008

Daniel Kahneman and Amos Tversky first proposed the term “planning fallacy” in their paper “Intuitive Prediction: Biases and corrective procedures” to describe the overoptimistic beliefs and procrastination that prevent people from doing all kinds of things on time like writing reports, filing taxes, or tackling do-it-yourself home projects. Economists Markus Brunnermeier, Filippos Papakonstantinou, and Jonathan Parker develop a theory to explain the planning fallacy in which people make poor predictions and procrastinate because the ex-ante benefit…s of anticipating that a task will be easy to complete are larger than the ex-post costs of planning poorly.

Without an intermediate deadline, two features of the model lead a person to exhibit the planning fallacy. First, the person has anticipatory utility. Thus a person who initially believes that the task will be easy to complete has higher expected utility because he anticipates less work in the future. This fi…rst ingredient provides an ex ante anticipatory benefit of overly optimistic beliefs. Second, the person optimizes given his beliefs. Thus a person with optimistic beliefs does little work in the present and ends up poorly smoothing work over time. This second ingredient implies an ex post cost of optimism on average: optimistic assessments lead to potentially costly delays and/or rushing at the end. Given these two ingredients, it is natural for people to exhibit the planning fallacy because a little optimism has fi…rst-order ex ante anticipatory benefits and, by the envelope theorem, only second-order ex post behavioral costs.

The trio tests their theory with observational data from experiments, and find that “monetary incentives for accurate prediction ameliorate the planning fallacy while incentives for rapid completion aggravate it.”