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The Daily Paradox

The Daily Paradox: The Underestimate

We all underestimate things frequently. New fast train connections are notoriously underestimated. Competition to get the business leads people to minimise the hard bits to give an underestimate in the knowledge that once it is being built increased costs will have to be met or the whole project will fail. Cost is an incentive to underestimate. Time is an incentive to underestimate the duration of a project – length of a war, a tragic example of this.

Even when we have no incentive to underestimate, we do so. How many times have you said ‘give me a minute’ and then taken – well, as long as it takes. Does it matter? Perhaps not to you but to the other person it is their life time being spent without consent. It matters. After an hour waiting for someone to answer the ‘your-call-matters-to-us’ phone, you feel it.

Estimating is forecasting and the world depends on it. As a planet we failed to forecast the consequences of a pandemic and it threw the world’s economies, health services and mode of operating into chaos from which we have not yet fully recovered. You can take the view that we were partly planned for it – if we hadn’t been it would have been much worse. Currently all sides in the EconoReligious disputes going on are underestimating the moment when rhetoric gives way to nuclear. Just as Hitler’s madness was underestimated before WWII.

Truth is a major factor in estimating. People often don’t want to hear it. If you are easily duped into believing what you want to believe it is inevitable that you will underestimate some of the time. A major weakness of mass communications is mass lying. It involves underestimating the consequences of what you say. It leads to exaggeration that initially may be fairly innocent but that becomes more dangerous with every step of excess that you take.

What is the solution to underestimating? I developed one solution for the business I and others were building in the 1980s.  I gave people very big bonus payments for achieving the targets they set themselves. Of courses, the size of the bonus was determined by the size of the target. High target, high bonus; low target, low bonus. Target achieved, bonus paid. Target not achieved, no bonus – whatever the reason for the failure, even if it was outside the control of the people who had set the target. Unfair? Of course. It was like life – but it concentrated the minds of the people setting their own targets wonderfully. It also made them moderately rich.

And it made the business valuable enough to be sold for 25 times earnings.

What about ‘target exceeded’? Very simple – bonus paid only for the target they had set themselves. Why should the business pay for poor forecasting? The basis of what I developed was a simple thought that people who were doing the work knew best how to forecast the year ahead. Not perfectly – they couldn’t know when the Suez Canal was going to be blocked or a conflict was going to erupt in the South China Sea. But their collective brains were better than a boss’s single brain to make forecasts.

Expectation and satisfaction are closely related bedfellows. How often have you enjoyed a meeting you were dreading or hated an event you had been looking forward to? The reason is often as much in the expectation as in the happening. That is why the over optimistic are often disappointed while the less optimistic are often pleasantly and surprisingly satisfied. Both underestimates and overestimates lead to disappointments.

So don’t distort what you genuinely forecast.

It could be your best reward ever.

Good morning
John Bittleston

How well do you forecast? We enjoy hearing at [email protected].

17 April 2024