Daniel Kahneman once helped write a new curriculum. Partway through, he asked the team how long it would take to finish. The estimates ranged from 18 to 30 months. Then he asked the curriculum expert on the team how long similar projects had taken. About 40% had given up, he said, and of the rest, he couldn’t think of one finished in less than seven years or more than ten. The project was finished about eight years later Published.

The inside view and the outside view

Kahneman and Dan Lovallo told that story in a 1993 paper that named the problem. The inside view forecasts “by focusing on the case at hand”: the plan, its obstacles, scenarios of how it will unfold. The outside view “essentially ignores the details of the case at hand” and looks instead at the statistics of a class of similar cases Published. The expert knew the base rate. He still gave an inside-view estimate until someone asked the other question.

Bent Flyvbjerg turned the outside view into a method, reference-class forecasting, and built a database of more than 16,000 big projects. In it, only 8.5% came in on budget and on time, and 0.5% on budget, on time and with the benefits promised Published. Your launches aren’t bridges. But the pattern of plans beating results is the same, and so is the fix.

Your plan is one scenario. The reference class is what usually happens.

Reference classes for a store

• New products: your own last ten launches, their first-90-day units against plan.
• New channels: what your last three channel tests cost per order in their first two months against what the plan said.
• New markets, wholesale accounts, big collaborations: your own history if you have it; peers’ honest numbers if you can get them; public filings for the big versions.

Your own history is the best reference class because it shares your team, product and customers. The ratio of actual to plan is often the most useful single number in it: if your launches have delivered 60% of plan on average, multiply the next plan by 0.6 before you buy inventory.

Adjusting from the base rate

The outside view is where you start, not where you stop. Your specifics matter, to the degree your specifics have predicted results before. The adjustment is the same regression as chapter 5: begin at the reference-class median and move toward your own estimate by the share that your past forecasts have tracked results. If they’ve tracked well, move most of the way. If they haven’t, barely move Derived.

With the defaults, a team forecasting $400,000 for a launch whose reference class usually does $120,000, and whose forecasts have tracked results only loosely, should plan on about $172,000. Eight in ten launches like it land between about $54,000 and $554,000, and the $400,000 plan has about an 18% chance of happening. That doesn’t mean don’t launch. It means don’t buy inventory for $400,000.

Do this

• Build your reference class this week: every launch in the last three years, with its plan and its actual first-90-day result. Compute the median ratio of actual to plan. Put it in the header of the next launch plan.