Time and again I’ve seen overzealous entrepreneurs set hefty business goals with extremely tight deadlines. When asked if all these can be achieved in so little time, the answer is always some version of, “Yes, it can be done.”
But what about the last time when it took more than a year instead of a month to achieve a similar milestone, the most common reply is, “This time it’s different.” These might as well be the 4 most costly words when it comes to making plans.
Nobody wants to make bad decisions, yet all of us make bad decisions day in day out. Often the smartest people make the dumbest of decisions. Because even the smartest of the people have the same factory settings in the OS of their brain, and often they get the better of themselves. One such mental error is having an “inside view”.
We often focus on a problem by using information that is close at hand. We make predictions based on our narrow and unique set of inputs. The more closely we know about a problem, the more intuitively we come to conclusions. The more detailed a plan we make, the more confident we become. In other words, we develop an inside view.
This is the same inside view that makes amateurs overcommit in weekly sprint plans. When asked to compare with past sprints, they sometimes readjust the estimates. What was originally supposed to be achieved in 7 days now becomes 10 days, but similar work has taken as much as 30 days to finish, so it hardly changes anything.
We take the inside view when we make judgments based narrowly on the details of a particular scenario that are right in front of us, and ignore past performance or similar scenarios. We naively assume it would be different this time.
This term was coined by Daniel Kahneman and Amos Tversky, and they have had their fair share of experience with the dangers of the inside view. Back in the day, Kahneman had assembled a team to write a high school curriculum on the science of decision making. After discussions, the lowest estimate to complete the project was one and half years. The highest was two and half years.
A team member was asked how this timeline compared to similar projects that have occurred in the past. The answer was that about 40% of the teams never finished at all, and not a single one took less than seven years. 7 years—let that sink in for a moment. Interestingly, none of the team members independently thought of comparing this instance to other projects.
Kahneman’s group was not willing to spend six more years on a project that might fail. They decided to forge ahead with the initial estimate of the group. The team finished 8 years later. By then Kahneman was not even on the team, and the agency that asked for the curriculum was no longer interested.
When we convince ourselves of the “special” nature of our case; when we say, this time it’s different, we read too much into the uniqueness of our situation while ignoring the similarities with others. Truth is, if the broad strokes are similar, chances are this project is going to take as long as the other projects did, if not longer. If the model looks similar from a distance, chances are this business is going to bite the dust like the others.
Inside view is a widespread phenomenon. If you’re asked to predict whether a particular stock will go up, or a particular movie will win an award, the more internal details you learn about any particular scenario—past performance and market sentiment regarding the particular stock, the inspiration and challenges behind the making of the movie —the more likely you are to say that the outcome you are predicting will occur. Knowing too much often doesn’t help.
VCs have too much faith in their own portfolio companies because they know every intricate detail about them. Amateur VCs look at them in isolation, and often fail to notice that similar companies with similar business models have failed in the past. But it’s different this time, right? Maybe the founding team is stronger, or maybe the tech is superior—there’s some reason or the other. Unless the differentiating factors are the governing factors, these petty differences are meaningless.
To break yourself out of it, you need an “outsider view”. You need to look at the similarities rather than the differences. You need to look at statistical evidence rather than anecdotes.
The outside view provides a ballpark of where the estimate is going to be. In practice it is better to start there and adjust it using the special knowledge of the inside view, instead of the other way.
Start with the generics and move towards specifics. Not following this process is why large projects routinely get delayed by years, and cost several times the projected cost. The lack of outside view is also why home renovations cost twice the initial estimate for an average household.
But it’s not that easy. Often, people fail to keep their ego in check, especially when they think that they are the difference makers. For example, if similar strategies have not given good returns in the past, chances are it’s gonna be the same this time as well. You aren’t really the “difference maker” you’ve led yourself to believe.
As Charlie Munger said, “If you notice, the plots are very similar. The same plots come back time after time.”
To summarise, there are two different ways to look at a problem:
- Make an estimate based on a plan and reasonable extrapolation of progress—the inside view.
- Abstract to the category of the case and observe its characteristics—the outside view.
Intuition prefers the inside view, while the outside view is non-causal and statistical. If you start your analysis from the outside view, with a known base rate, it gives you a fair anchor and ballpark to work with.
But what makes the insider view deadly is that it’s not a simple cognitive bias. In fact it’s a superbias—a combination of a lot of powerful biases that sway us from making intelligent decisions. When you lead with intuition, and then go ahead to verify it, you are heavily suffering from confirmation bias.
After being provided with counter evidence, if you neglect them, you suffer from base-rate neglect bias. If you take heed and readjust your intuition, you fall prey to anchoring effect because your original hunch still acts as the anchor, thereby blinding you from reality.
Having confidence in your prediction because you’ve made a detailed plan is a result of planning fallacy which creates the optimism illusion. And by this time, you already know too much about your scenario—a business, a stock, or a movie—which compels you to make all kinds of wrong decisions because of its “special” nature. You have fallen prey to the conjunction fallacy.
I’ve dramatised it a bit. You don’t necessarily fall prey to all biases, and definitely not in that order, but I hope you get the point I’m trying to make.
Our natural inclination to take the inside view can only be defeated by following the analogies of an outside view. It is deeply counterintuitive because it requires a us to ignore unique surface features of the current scenario, in which we’ve built expertise, and instead look outside for structurally similar analogies. It requires a mindset switch from narrow to broad.
Sometimes, the opposite can happen as well. Instead of getting optimistic about your scenario, you might get pessimistic since you know too much about your situation, for example how you are holding together your fledgeling business. You might feel it’s going to fall apart anytime. But when you compare it with other similar businesses in similar situations that have done seemingly well over the years, sanity prevails. Having an outside view saves you from the pessimism illusion as well.
Entrepreneurs don’t take risks because they love risk. They do it because they don’t know the odds. They don’t fully appreciate the risks they are taking and suffer heavily from an inside view. Often times, they assume that they are the special case, and this time it’s different. No wonder 99 out of 100 fail.
When you look at big successes, it’s because someone tried something they shouldn’t have, the odds were against them, and they got lucky. Optimism is the engine of capitalism after all.
I’ve nothing against optimism. I myself am an optimist by nature. I wish all of us to be optimists. Optimists are happier, and they persevere more. I just don’t want naive optimists who chronically suffer from inside view. We have to make a conscious effort to make our successes and predictions less about luck.
“It is tough to make predictions, especially about the future,” goes the old saying. Don’t forget to look at a problem from both ends. Weigh in the similarities and differences equally the next time you are asked to make a prediction.