Being human: It’s a challenge for starting new trading ideas

Have you ever wondered why everything seems to take so much longer than you expected?

Have you ever happily sat at a desk and completed a rough calculation of full cost recovery for a bid, only to discover – once you get to delivery – that you wildly underestimated how much time everyone would need to put into the project?

Have you ever decided to set aside ‘a couple of hours’ for a task, only to still be working on it that evening?

You may have fallen victim to the ‘planning fallacy’, and if you are trying to judge the feasibility of a trading idea, it could completely erode your ability to turn a profit.

Everyone underestimates how long tasks will take

The theory, originally proposed by Daniel Kahneman and Amos Tversky in 1979 – and subsequently backed up by a lot of good research, is that individuals tend to have a bias towards optimism when predicting how long a task will take. The reasons for this are disputed, but it happens regardless of past experience.

And the tendency is pretty hard to get around. Some advocate ‘segmenting’ tasks into the smallest unit (which reduces the overall over-estimation, but in itself takes time and resource). Others suggest referencing previous similar tasks – assuming such data exists (important: you can’t rely on your memory for this, as people tend to ‘explain away’ any delays by blaming them on external or unusual circumstances).

The planning fallacy and the feasibility of trading ideas

I was reflecting on this on the way home from delivering our new training course for organisations looking to begin trading. During the day, delegates comprehensively evaluated their idea, particularly how it sits within their organisation (as starting trading from within an existing charity is very different from starting a completely new social enterprise).

Most importantly, they began to think of how to test it. To test assumptions about whether there was a market, whether their price point worked, how internal processes would support it. And whether it was cost effective.

Which is where the planning fallacy comes in; if you write a business plan for a new trading idea without any testing, then – according to quite a large body of academic research – you are more than likely going to wildly underestimate the amount of time and resource that will be needed.

Which is why so many projects – in the public, private and voluntary sector – seem to end up massively overrunning.

This is fine, if – like the Sydney Opera House – you can afford to go 10 years and $95m over budget, but most of us operate on much more precarious margins. Especially if the trading venture is supposed to be propping up lost income from elsewhere!

What can you do to get around it?

1. Build in a contingency. Both in time and money (it doesn’t matter if your plan has been written by the most experienced person in the world – or the most seemingly cautious).
2. Draw on a wider pool of opinions about tasks. It’s really interesting that the planning fallacy apparently only applies to tasks you are involved in. A truly external pair of eyes on your plan (meaning, not involved in developing, delivering, or with a stake in the venture) may be able to predict resource and timeframes more accurately.
3. Don’t rely on the income from a new trading venture until it is in the bank. Treat a new trading idea as you would a legacy – with the proper groundwork, the income will arrive, but don’t commit to spending it until you’ve got it!
4. Try not to demoralise individuals by blaming them for not making entirely accurate predictions. You would have done exactly the same!
5. If, once you have worked through the feasibility of a trading idea, there is significant evidence it will not be able to turn a profit, then heed the evidence – it is likely to be even worse than predicted. Play with your predicted costs and timeframes – what happens if everything takes longer?
6. Most importantly, don’t undertake any trading venture that is ‘off-mission’ unless you have evidence to back up your plans and have completely ring-fenced the risk to your charity if it is unsuccessful.

If you’ve got an idea that you’d like to put to the test, we’ll next be running our Turning Ideas into Income course on 5 October.

Or send us an email to discuss a bespoke version of the course for your organisation, or consultancy.