Monday, 1 September 2008

Fallacies of Planning

I read a post on Overcoming Bias that referenced the planning fallacy. I thought this was going to turn out to be more interesting that it did, so instead of the original content, let me propose a different planning fallacy.

The fallacy is simply that people tend to believe that executing the plan will achieve the desired objective and only that. We are used to plans working in simple cases: I'm hungry, so I make a plan to go to the fridge. I execute the plan and lo, food is mine.

We are even used to plans not working: I might slip on the way to the fridge and end up on the floor swearing rather than happily nibbling some dairy delicacy. But typically if a simple plan works, then the consequences are simple and easy to guess. The amount of cheese in the fridge decreases. Big deal.

Plans for complex objectives, however, usually involve unexpected (and therefore by definition unintended) consequences. Lowering rates doesn't lower Libor because banks hoard cash. Saying you will protect the Agencies does not reassure the markets because they don't believe you or they don't know what 'protect' means, exactly -- or for some other reason entirely. And so on. I suggest that the study of planning failures (and successes) should be compulsory for politicians and economists.

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