The term was coined by psychologists Daniel Kahneman and Amos Tversky in 1979 to describe our tendency to underestimate the time, cost and risk of future tasks, while overestimating their benefits. Crucially, this happens even when we know that similar tasks have taken longer in the past.
In one well-known study, university students were asked to estimate how long it would take to finish their thesis. On average they predicted around 34 days. The actual average was around 56 days, and only about 30% finished within the time they had predicted.
Closer to home, the Sydney Opera House is a famous example. It was originally expected to be completed in 1963 for around $7 million. It opened in 1973, at a cost of roughly $102 million.
We plan for the best case. We picture the project going smoothly and don't allow for the sick days, supplier delays and unexpected problems that almost always turn up.
We see this project as unique. We focus on the details of the task in front of us and ignore what happened last time.
Optimism feels productive. Ambitious deadlines can be motivating, and nobody wants to be the one who says it will take twice as long.
The planning fallacy can quietly affect cash flow forecasts, hiring plans, product launches, system changes and property projects. A project that runs three months late doesn't just delay the benefits. It often means extra costs, stretched teams and decisions made under pressure.
Look at the track record. Kahneman recommended reference class forecasting: before estimating, ask how long similar projects actually took, in your business or elsewhere, and start from there.
Run a pre-mortem. Imagine it's six months from now and the project has failed. Ask your team to list the reasons why. This surfaces risks that optimism tends to hide.
Build in a buffer. Add contingency to both time and budget, and treat it as part of the plan rather than a sign of weakness.
Ask an outsider. People who aren't emotionally invested in a project are often better at spotting unrealistic assumptions.
Plan backwards from hard deadlines. Start from the date that can't move, such as year-end, lodgment dates or the Christmas shutdown, and work back to when tasks really need to begin.
With only a few months left in the calendar year, now is the time to be realistic about what can be achieved before the break. A little extra buffer today could make for a much calmer December.