Planning Fallacy or Hiding Hand: Which is the Better Explanation?
10 Pages Posted: 30 Jan 2018
Date Written: March 1, 2018
This paper asks and answers the question of whether Kahneman's planning fallacy or Hirschman's Hiding Hand best explain performance in capital investment projects. I agree with my critics that the Hiding Hand exists, i.e., sometimes benefit overruns outweigh cost overruns in project planning and delivery. Specifically, I show this happens in one fifth of projects, based on the best and largest dataset that exists. But that was not the main question I set out to answer. My main question was whether the Hiding Hand is "typical," as claimed by Hirschman. I show this is not the case, with 80 percent of projects not displaying Hiding Hand behavior. Finally, I agree it would be important to better understand the circumstances where the Hiding Hand actually works. However, if you want to understand how projects "typically" work, as Hirschman said he did, then the theories of the planning fallacy, optimism bias, and strategic misrepresentation – according to which cost overruns and benefit shortfalls are the norm – will serve you significantly better than the principle of the Hiding Hand. The latter will lead you astray, because it is a special case instead of a typical one.
Keywords: The principle of the Hiding Hand, the planning fallacy, optimism bias, wider development impacts, dynamic linkages, cost-benefit analysis, project management, development economics, behavioral science, Albert O. Hirschman, the World Bank
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