Will That Project Really Pay Off as You Expect?
A new manufacturing plant closes prematurely. An acquisition fails to boost profitability. A start-up can't gain market share. Why such disappointments? Under pressure to accent the positive, managers overemphasize business initiatives' potential benefits and ignore the possibility of mistakes.
How to accurately predict a project's possible value? Use reference forecasting. First, select a set of past projects to serve as your reference class. Then identify the average and extremes in these projects' outcomes. Estimate where your project would fall along the reference class's distribution. Then revise your estimate based on your prediction track record -- how well your past predictions have matched actual outcomes.
Today's Management Tip of the Day was adapted from the HBR article, "Delusions of Success: How Optimism Undermines Executives' Decisions," by Dan Lovallo and Daniel Kahneman.
July 31, 2008; 9:00 AM ET
Management Tip of the Day
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