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The Planning Fallacy

When working on tasks of substantial complexity, Douglas Hofstadter, an American writer and intellectual, made the following observation which he dubbed the Hoftstadter law: “It always takes longer than you expect, even when you take into account Hoftstader’s Law.” Note that the circularity of this principle is remarkable: Since every task takes longer than expected, then even if the expectations as reset accordingly, the task may take longer than the reset expectations, which calls for a further resetting of expectations, ad infinitum. In other words, nothing gets ever done.

But this is perhaps taking the Hofstadter’s Law too literally. Its primary idea is that complex tasks and processes tend to take more time and resources to complete than initially anticipated, which has also been called the “planning fallacy”. That tendency has been established through many experiments which demonstrate that planners, including when working as a group, tend to systematically focus on the most optimistic scenario as a natural bias.

The phenomenon rings true for corporate reorganizations and restructurings, including those related to post-merger integration projects. It also appears to be particularly pertinent when considering the complex tasks for a multitude of economic actors to implement the measures required to absorb a shock or for governments to implement new policies.

Remember: The Great Financial crisis? Fixed by Easter ‘09, as many were predicting in the immediate aftermath of the TARP vote in October ‘08. The China-driven mining downturn in 2012? Give it six months. The fall in oil prices in 2014? The market could rebalance in about half a year. Brexit? The separation process will be much clearer by the end of ‘16. A fiscal package in the US on the back of the last presidential election? Done by now!

Six months” seems to be the generally assumed gestation period to implement deep change at the economic or political level, much like the gestation period for baboons. Unfortunately, six months grossly underestimates the actual time required to get the job done. In fact, the larger the number of contributors to a task or project, the more relevant Hofstadter’s Law seems to be.

One has to give time some time” wrote Miguel de Cervantes. If economic actors’ expectations with respect to complex macro-economic and political tasks and projects were set more reasonably from the start, it would most likely allow the world to run faster by smoothing the cycles of exaggerated hopes and damning disappointments. For example, if economic actors had acknowledged in 2009 that it could take a decade to implement the steps required to digest a financial crisis as demonstrated through the historical analysis by Reinhart and Reinhart (see “Extreme Divergence”), then it is plausible that better decisions would have been made during the downturn, which could have shortened its length.

So, in terms of expected gestation period when it comes to large scale macro-economic or political processes, think “mammoth” and not “baboon”.

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