Decision makers are excessively prone to treat problems as unique, neglecting both the statistics of the past and the multiple opportunities in the future.
These are the result of two biases.
- The forecasts of future outcomes are anchored on plans and scenarios of success, rather than on past results, and are hence overly optimistic
- Evaluations of single risky prospects neglect the possibility of pooling risks
There are two distinct modes applied to forecasting. The inside view of the problem focuses on the case at hand, by considering the plans and obstacles to its completion, and constructing scenarios of future progress. This is the mode commonly adopted.
The outside view ignores the details of the case at hand, and focuses on statistics of cases similar to the present one.
When making a forecast, it is useful to consider the outside view first to obtain a ball-park number. Then, use the insider view to adjust the previous estimation up and down.
Kahneman, Daniel, and Dan Lovallo. n.d. “Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking.” INFORMS. https://doi.org/10.1287/mnsc.39.1.17.