What is the importance of ‘the outside view’?  - Chapter 23

Kahneman was asked to write a textbook about decision making and judgments. After one year, a number of chapters and the syllabus had been written, which was considered good progress. Kahneman asked his team to separately estimate how long it would take to finish the textbook. The average estimate was two years. He then asked an expert in developing curricula, who was part of the team, how long it took for similar teams to finish a textbook. He answered that about 40% of the teams never managed to complete one. Kahneman never considered the possibility of failing. The teams that completed the task had finished the book in seven to ten years. He also rated the resources and skills of Kahneman’s team slightly below average. Even the expert himself was surprised by it, as his previous estimate was two years. Before the questions were asked, his mind did not make the connection between his knowledge of the progress of other teams and his prediction of the future of the team he was in. While everybody ‘knew’ that a 40% chance of failure and a minimum of seven years was more likely than the prediction of two years, they did not acknowledge this information. It seemed unreal, because it was impossible to imagine it taking so long. The reasonable plan to finish the book in two years conflicted with the statistics. The base-rate information should lead to the conclusion that writing a textbook is much harder than previously thought, but that conflicted with the direct experience of making good progress. It would have been wise to cancel the project, because no one wanted to spend six more years on a project with a  fairly high chance failure, but they continued. The textbook was finished eight years later, due to numerous unpredictable events. Three lessons were learned from this story:

1. There is a distinction between two very different approaches to predicting, called the inside view and the outside view.

2. The initial predictions exhibited a planning fallacy. The predictions were closer to a best-case scenario, lacking realism.

3. Irrational perseverance (not cancelling the project). When face with a choice, they gave up rationality.

The inside view was adopted to assess the future of the project. The team focused on their specific circumstances and searched for evidence in their own experiences They knew how many chapters they were going to write and knew how long it taken to write the already finished chapters. Only a few less optimistic members of the team added some months to their estimates (margin of error). The predictions were based on the available information: WYSIATI, but the already written chapters were probably the easiest and the motivation at its peak. The biggest problem was failing to take the ‘unknown unknowns’ into account. On that day, the events that would make it a prolonged project were not foreseen (sickness, divorces, bureaucracy). A failed plan can have many reasons, and although most of them are very unlikely to happen, the probability that something will go wrong in a major project is high.

The baseline prediction (seven-ten years and a 40% chance of failing) should have been the anchor for adjustments. The comparison of the team with other teams indicated that the predicted outcome was worse than the baseline prediction. This regards the outside view, which suggested that the inside-view predictions were not even close. The difference between the expert’s judgments is remarkable: he had so much relevant knowledge in his head, but he did not use it. The other members of the team did not have access to the outside view, but they also did not feel they needed information about similar teams. This happens often: people who have information about one case almost never feel the need to know the statistics of similar cases. When they were told about the outside view, they ignored it. Statistical information tends to get ignored when it challenges someone’s own impressions of a case. The inside view beats the outside view.

Forecasts and plans are called ‘planning fallacies’ when they are unrealistically close to best-case scenarios and could be improved by consulting statistics of similar cases. An outside view can prevent a planning fallacy. The remedy for this fallacy, introduced by planning expert Flyvbjerg, is called ‘reference class forecasting’: a big database which provides information for numerous projects world-wide.

People frequently take on risky projects because they are too optimistic about the odds: they underestimate the costs and overestimate the benefits. Many executives fall victim to the planning fallacy. They base their decisions on unjustified optimism instead of on a rational weighting of probabilities, losses and gains.