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The planning fallacy in oil and gas decision-making

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 Lead author THE PLANNING FALLACY IN OIL AND
Matthew
Welsh GAS DECISION MAKING
M. B. Welsh, N. L. Rees, H. A. Ringwood and S. H.
Begg
Australian School of Petroleum
University of Adelaide
North Terrace
Adelaide SA 5005
matthew.welsh@adelaide.edu.au
nigel.rees@student.adelaide.edu.au
hugh.ringwood@student.adelaide.edu.au
steve.begg@adelaide.edu.au
ABSTRACT
The ‘planning fallacy’ describes the tendency of people
to underestimate costs and times required for the comple-
tion of complex projects. Psychological research has dem-
onstrated that a key component of this results from the
packing/unpacking bias—where options or problems that
are not specifically stated tend to be ignored by people
when making estimates or assigning probabilities to events.
We have investigated this effect as it relates to oil and
gas decision making, highlighted by experimental results
comparing estimates of drilling times made by both student
and industry participants. Specifically, participants were
provided with a drilling scenario and asked to estimate
the time required to drill the well—including drilling,
tripping, rigging and all potential problems. In the packed
condition the options were given as just stated while, in the
unpacked condition the ‘all potential problems’ category
was divided into a list of specific problems.
The packing effect was shown to markedly alter the
time estimates made by all groups of participants—alter-
ing estimates of problem times by more than 100 hours
on average. Additional analyses assessed the interactions
between the packing/unpacking effect and personal traits
such as optimism, tendency to procrastinate and industry
experience. These findings are discussed in terms of their
import for oil and gas decision makers desiring to improve
prediction accuracy and, thus, economic outcomes by
avoiding, or limiting, the impact of the planning fallacy.
KEYWORDS
Decision making, planning fallacy, optimism, procras-
tination, bias.
SECOND PROOF—WELSH 27 JAN 10
INTRODUCTION
The planning fallacy
Decision making under uncertainty, whether regard-
ing subsurface geology or future economic conditions, is
an integral part of the oil and gas industry. In fact, the
industry is often regarded as the classic example of deci-
sion making under uncertainty (Newendorp and Schuyler,
2000). It has been well documented, however, that the oil
and gas industry has a poor record when it comes to ac-
curately assessing these uncertainties—costing the sector
upwards of $30 billion per year from unexpected outcomes
(Goode, 2002).
A specific bias known to affect oil and gas decisions,
first described in the 1970s (see Kahneman and Tversky,
1979), is the planning fallacy. This is the tendency to hold
a confident belief that one’s own project will proceed as
planned, even while knowing that the vast majority of
similar projects have run late (Kahneman and Tversky,
1979). More generally, people are inclined to underestimate
how long it will take them to complete tasks and projects,
and how much these projects will cost.
There are countless examples of this phenomenon: the
Panama Canal, Montreal Olympic Stadium, the Sydney
Opera House and the Channel Tunnel between Britain and
France all suffered heavily from the planning fallacy. A
more recent example is the Wembley Stadium-Multiplex
debacle.The stadium was initially scheduled for completion
in 2003; however, destruction of the old stadium was not
even completed by this time. Subsequent financial, legal
and construction knock-on delays resulted in a reschedule
of the expected completion time to May 2006, to be ready
for the FA Cup final; however, construction was further
delayed and only completed in March 2007, some four
years later and estimated to be $109 million over budget
(Long, 2005). A study of oil and gas projects has showed
that the industry is equally susceptible to this bias, with an
analysis by Merrow (2003) concluding that mega-projects
(those requiring investments of over $1 billion) suffered
an average of 46% cost and 28% time overruns.
What causes the planning fallacy?
People plan tasks on a daily basis and have, over the
course of their lives, had ample opportunity to learn that
their completion predictions suffer from an optimistic bias
APPEA Journal 2010 50th ANNIVERSARY ISSUE—1
M. B. Welsh, N. L. Rees, H. A. Ringwood and S. H. Begg
(Koole and Spijker, 2000). With this in mind, we must ask
why people continue to fall victim to the planning fallacy.
Buehler et al (1994) summarised three main elements
in people’s predictions of task completion times: people
underestimate their own but not others’ completion times;
people focus on plan-based scenarios rather than on rel-
evant past experiences while generating their predictions;
and people’s attributions diminish the relevance of past
experiences.
INSIDE/OUTSIDE PERSPECTIVE
The first of Buehler et al’s (1994) points refers to the
proposal from Kahneman and Tversky (1979) that opti-
mistic predictions are made when one considers an inside
or singular view to estimating a task completion time.
This involves looking at the task’s specific aspects and
how they will be completed. This is opposed to an outside
or distributional view, which is when one considers the
task in a broader perspective including knowledge of how
long similar tasks have taken to complete and possible
complications delaying progress. Ideally, of course, people
should conduct their predictions using both singular and
distributional information. The existence of the planning
fallacy, however, implies that people implement an internal
perspective when predicting completion times. Specifically,
it seems that people tend to overlook their past experiences
and judge each new project as a singular event. That said,
people readily adopt an outside approach when making
predictions for other people’s projects’ completion times—
recognising that a project of particular type is likely to take
approximately as long to complete as similar projects.This
is known as the actor-observer differences in prediction;
we are not surprised if our neighbour’s house extension
runs overtime, or if a colleague misses a deadline, as we
have repeatedly seen these types of event, yet we do not
always make the leap to considering our own projects in
this distributional manner (Buehler et al, 1994).
More generally, the consensus from researchers is that
people typically arrive at their predictions by constructing
a mental scenario that sketches out how a given project
is likely to develop (Buehler et al, 1994). As humans are
incapable of predicting all possible outcomes of an event,
these mental scenarios neglect many alternative ways in
which the future might unfold. This process of scenario
thinking influences people to hold on to their favourite
versions of the future, causing people to repeat their past
mistakes despite their knowledge of past outcomes (Bue-
hler et al, 1997).
This is a form of motivated reasoning (Buehler et al,
1997), a phenomenon in which people’s reasoning is af-
fected by motivational factors. Kunda (1990) proposed
that motivation may affect reasoning through reliance on
a biased set of cognitive processes—that is, strategies for
accessing, constructing, and evaluating beliefs. The mo-
tivation to be accurate enhances use of those beliefs and
strategies that are considered most appropriate, whereas
the motivation to arrive at particular conclusions enhances
use of those that are considered most likely to yield the
2—50th ANNIVERSARY ISSUE APPEA Journal 2010
desired conclusion. Koole and Spijker (2000) argue that
the notion of motivated reasoning also extends to the task
of generating completion predictions. People’s wishes and
desires thus affect their tendency to engage in scenario
thinking, thereby producing a change in their level of op-
timistic bias.
UNPACKING
Kruger and Evans (2004), however, suggest that taking
an inside perspective does not always result in a planning
fallacy. They argue that the planning fallacy is, often, a
result of just the opposite—not analysing the task enough
in an inside perspective. They hypothesise that prompting
people to think more about the task at hand and its indi-
vidual components can lead to a decreased—as opposed
to an increased—planning fallacy.
This approach follows from the work of Fischoff et al
(1978), who showed that people’s assessments of the likeli-
hood of various events was affected by the manner in which
the events were presented. Specifically, they showed that
people’s assessments of the probable reasons for a car not
starting were limited by the explicit options available to
them. That is, the weight assigned to a catch-all ‘all other
problems’ category was found to be much less than the
weight assigned to the explicit categories that comprised
that general category.
While not referring to this effect specifically, Tversky
and Koehler’s (1994, pp. 332–3) statement regarding sup-
port theory is germane:
‘When people assess their degree of belief in an
implicit disjunction, they do not normally unpack the
hypothesis into its exclusive components and add their
support, as required by extensionality. Instead, they tend
to form a global impression that is based primarily on
the most representative or available cases. Because this
mode of judgment is selective rather than exhaustive,
unpacking tends to increase support. In other words,
the support of a summary representation of an implicit
hypothesis is generally less than the sum of the support
of its exclusive components.’
Applying this thinking to the planning fallacy suggests
that one reason why people may set optimistic task
completion times is that they do not naturally unpack
those tasks into their various subcomponents (Kruger and
Evans, 2004).
PERSONAL TRAITS
A secondary concern for those interested in the plan-
ning fallacy is whether there are individual traits that
result in greater or lesser susceptibility to the bias. For
example, one might expect that more experienced people,
having seen a greater variety of tasks of the type under
consideration, might be less susceptible. This is, however,
at odds with both the inside/outside view explanation
presented above (which argues that people tend to ignore
past results) and the results from Fischoff et al’s (1978)
study where mechanics were shown to be just as likely
SECOND PROOF—WELSH 27 JAN 10

to fall victim to the packing of specific categories for a
car not starting into a general one as a student sample.
Other traits one might expect to impact on the planning
fallacy include optimism and the tendency to procrasti-
nate. The research on these questions has, however, been
varied, and it seems unclear as to whether certain effects
described result from stable, personality traits or contex-
tual drivers. For example, Buehler et al (1997) identified
that incentives to finish a task promptly tended to increase
the optimistic bias in time prediction and increased the
tendency to neglect or underweight previous experiences.
While optimistic time predictions provide initial impetus
to get a project underway, any benefit of this diminishes
over time and consequently long-term projects can suffer
considerably (Buehler et al, 1997). In this context, then, it
seems less than clear whether the optimism referred to
is, in fact, an attribute of the individual.
Similarly, Pezzo et al (2006) suggested that self-pre-
sentation motives can lead to an increase in optimistic
planning. A key attribute in time prediction for projects
is that they are normally required to be reported to other
people (such as management). As a direct consequence,
people tend to make optimistically biased time predictions
in order to present well to others. Thus, accountability has
little effect on debiasing the planning fallacy as making
time predictions available to the public also increased
self-presentation concerns. In neither case, however, was
the individual’s baseline level of optimism considered a
potential contributor to the planning fallacy.
Procrastination, by contrast, has been specifically dis-
cussed in terms of the planning fallacy but the results are
not clear. Given that procrastination, by definition, involves
the behaviour of postponing task initiation (Ferrari et al,
1995) one would expect that this would have an impact
on completion times. Specifically in terms of the planning
fallacy, this suggests that a procrastinator will suffer from
optimistically biased task completion time forecasts. Con-
versely, Buehler and Griffin (2003) discussed that there
may also be reason to believe that procrastinators may
be less inclined to optimistic bias—as Lay (1995) noted
many procrastinators dwell on their past experiences of
task completion time problems more readily than non-
procrastinators, which could be interpreted as greater will-
ingness to adopt an outside perspective when estimating
completion times. Pychyl et al (2000) found that students
who scored highly on a procrastination scale did, in fact,
start their tasks later and spend less time on the task than
a non-procrastinator. They were, however, able to predict
these actions in advance.
Avoiding the planning fallacy
As previously discussed, Buehler et al (1997) investi-
gated the role of motivated reasoning in making completion
predictions. The results showed that participants who had
received a speed incentive displayed greater optimistic
bias in their completion predictions relative to participants
without such an incentive. Another observation was that
participants who were provided with an accuracy incen-
SECOND PROOF—WELSH 27 JAN 10
The planning fallacy in oil and gas decision making
tive displayed a marginally significant tendency to over-
estimate their completion times; that is, they tended to
predict more pessimistically. These findings indicate that
motivational reasoning has the ability to influence the
degree of optimistic bias by affecting people’s tendency to
engage in scenario thinking (Koole and Spijker, 2000) and,
thus, Buehler et al (1997) argue that it may be possible to
eliminate the planning fallacy altogether by substituting
speed incentives for accuracy incentives.
An alternate approach is the one put forward by Kruger
and Evans (2004)—if the planning fallacy results from
a failure to unpack a task into its constituent subtasks,
then unpacking a task prior to having participants make
estimates should increase the accuracy of their estimates.
This approach is the one that we test herein as it requires
no incentives and has been shown to increase accuracy in
simple oil-industry related questions (Welsh et al, 2005).
Aims and hypotheses
The present studies chiefly look at whether the plan-
ning fallacy is observed in an oil and gas decision-making
task, and what impact a variety of variables have on its
strength. Specifically, we are interested in whether: un-
packing a task into more comprehensive sub-tasks lessens
its effects; participants of differing levels of experience
are affected differently; having received training in deci-
sion making grants a benefit; and, people with different
personality traits differ in their estimates or susceptibility
to the planning fallacy.
HYPOTHESES
H1. People in the unpacked condition will estimate longer
times for problems associated with drilling.
H2. People in the unpacked condition will estimate longer
completion times for the drilling task.
H3. All four groups will be affected by the planning fallacy.
H4. Decision training will lessen susceptibility to the
planning fallacy.
H5. Optimists will tend to estimate shorter times for
problems associated with drilling.
H6. Procrastinators will tend to estimate shorter comple-
tion times for the drilling task.
METHODOLOGY
Participants
Participants were 104 petroleum engineering students
and oil and gas industry professionals, 77 male and 23
female (with four failing to state their sex) with a mean
age of 25.7 years (Standard deviation [SD] = 9.4). These
were gathered as four separate groups: third year, fourth
year, masters, and industry. The groups differed in terms
of their average industry experience from less than half a
year to more than 10 years. Participants from each group
were randomly assigned to either the packed or unpacked
questionnaire condition. The summary statistics for each
of these groups are given in Table 1.
APPEA Journal 2010 50th ANNIVERSARY ISSUE—3
M. B. Welsh, N. L. Rees, H. A. Ringwood and S. H. Begg
Materials and procedure
Participants’ details were gathered using a survey de-
livered in person (to the three student groups) or online
(to the industry group). This requested the participant’s
age, sex, years of industry experience and asked whether
they had received decision training or not (participants
were free to decide what constituted decision training and
thus we expected significant differences in what a ‘yes’ in
response to this question might signify in practical terms).
The questionnaire also included two personality scales, the
Lay procrastination scale (LPS) to measure procrastination
(Lay, 1986) and the revised Life Orientation Test (LOT-R)
to measure optimism (Scheier et al, 1994), the summary
results of which are shown in Table 1.
Finally, participants were asked to estimate task comple-
tion times (in hours) for a hypothetical infill well described
to them in general terms as follows:
‘An oilfield is located offshore Louisiana in about
350 ft of water. The field contains four wells that are
currently producing 1,000 bbl of oil and 18 MMSCF of
gas per day. Production is declining and it has been
decided to drill an infill well in order to improve pro-
duction. The well is required to be drilled to 10,000 ft
drilling overbalance with mud. For this example, we
will assume the well can be drilled straight to 10,000 ft
without the need for staged casing. The rig is already in
place and ready to commence drilling. From other well
data, the stratigraphy can be assumed to be reasonably
homogeneous and consolidated. The well needs to be
ready up to the point where casing could then be run
if required.’
In the packed form of the questionnaire, seen by ap-
proximately half the participants, they were asked to make
time estimates for the following tasks: drilling, tripping,
rigging up and all other associated problems. In the un-
packed version, by comparison, the all other associated
problems category was broken down into its individual
components as follows: mud conditioning, well control op-
erations, fishing operations, severe weather, rig repairs
and logistic delays.
Data analysis and comparison
In all cases, we use null hypothesis significance testing
(NHST) to assess the strength of any differences between
Table 1. Summary of group statistics—counts, means and SDs (in parentheses).
Group N Male Female Age
Third year 32 20 12 21.4 (2.9)
Fourth year 29 24 3 24.1 (7.4)
Masters 16 9 6 26.5 (5.4)
Industry 27 24 2 32.5 (14.0)
Note: the scores in the procrastination and optimism columns are the means and SDs of participants’ raw scores from the LPS and LOT-R tests described in the
materials and procedure section.
4—50th ANNIVERSARY ISSUE APPEA Journal 2010
groups and the relationships between our variables. NHST
includes a wide variety of statistical tests but linking all
of these is the calculation of a p-value, which indicates
the likelihood of seeing as large a difference between
groups (or as strong a relationship between variables) as
observed in the data, by chance alone. That is, a p-value
of .05 (conventionally written as p = .05), indicates that
there is only a 5% chance of having found a relationship
as strong as the one in the data if there is, in truth, no such
relationship. A p-value of .05 or lower is, by convention,
accepted as the cut-off for concluding that there is, in fact,
a statistically significant relationship in the data. We use
this convention throughout.
While the analyses of primary interest are the com-
parisons between the different groups in our experiment,
we have also included comparisons with an analogue in
the form of the time breakdown of an offshore Louisiana
well (Bourgoyne et al, 1986) so as to ground our results
against real-world values. Our task, however, excluded cer-
tain tasks incorporated into the analogue (such as casing
placement) so the analogue times were adjusted to take
these differences into account. Table 2 shows the adjusted
time estimates from the analogue well.
RESULTS
Overview of data
Before analysing the data in terms of the hypotheses
regarding the effect of group and question form (packed or
unpacked), a general overview of the dataset as a whole was
desired in order to assess the strength of any relationships
between the demographic variables and the personality
measures. Preliminary assessment of the relationships be-
tween the variables generated a correlation matrix using
ranked rather than raw data for the time estimates, as
the data were not normally distributed (time estimates,
both generally and in our data, tend to be exponentially
distributed). This is included as Table 3.
Looking at Table 3, one sees, firstly, that the four time
estimates (drilling, tripping, rigging and problems) are all
related to one another with significant, positive, correla-
tions ranging from .39 to .68, p < .001. That is, people who
tended to estimate longer times for one aspect of the task
also estimated longer times for the other three.
Turning, secondly, to the personality variables (optimism
and procrastination), one sees limited impact of these on
Years of experience Procrastination Optimism
0.4 (1.4) 56.7 (10.4) 15.6 (2.4)
1.4 (4.9) 56.8 (13.6) 15.5 (3.9)
2.9 (3.1) 53.75 (10.7) 17.3 (2.7)
10.1 (13.9) 51.1 (8.7) 16.4 (2.5)
SECOND PROOF—WELSH 27 JAN 10
 The planning fallacy in oil and gas decision making

the time estimates. Procrastination seems as if it may be
weakly related to the estimation of problem times, with
people inclined toward procrastination slightly more likely
to estimate lengthier delays due to problems. This rela-
tionship, however, while nearing statistical significance,
p = .057, is very weak at r (102) = .19. Optimism, similarly,
has only weak relationships with the time estimates, with
more optimistic people perhaps slightly more likely to
estimate shorter times for problems, r (102) = .19, p = .059.
Thirdly, we consider the role of demographic variables
(age, experience and sex). Of these, only the first two are
included in the correlation tables and one can see that
they are, unsurprisingly, very strongly related to one an-
other, r (98) = .954, p <.001, and can, as such, be treated as
measures of essentially the same thing. Strangely, though,
it seems that age, rather than experience, has the stronger
correlations with the time estimates, correlating positively
and significantly with all of the time estimates except
Table 2. Adjusted time breakdown from analogue well.
problems.That is, older (more experienced) people tended
to estimate longer times to complete the drilling, tripping
and rigging aspects of the described task but not for the
problems.
Finally, we consider whether sex plays a role in time
estimation or affects the personality variables. To assess
this, we used a series of Mann-Whitney U-tests (non-par-
ametric equivalents of independent samples t-tests that
allow comparisons to be made despite the fact that the
variables we are considering are not normally distributed).
These found that males’ estimates of drilling and tripping
times were significantly (or nearly so) longer than females’,
U = 648.5 and 708.5, p = .023 and .072, respectively. The
strongest effect, however, was for age, with females being
significantly younger than the males, U = 568, p = .009.
Given the relationships between age and time estimates
described above, it seems likely that this effect accounts
for the majority of the differences in time estimation be-
tween the sexes. As such, we do not consider males and
females separately beyond this point.

Task Hours Time Fraction Effects of experimental conditions

Drilling 300 0.26 To assess the effect of the experimental conditions -
that the four groups would differ from one another and
Tripping 200 0.17
that the form on which the question was presented to
Rigging up 250 0.22 the participants (packed or unpacked) would affect their
time estimates—a series of eight 2x4 analysis of varianc-
All Associated Problems 400 0.35
es (ANOVAs) were run; one for each of the variables in
mud conditioning (145) (0.13) Table 3. In each case, given the knowledge that the time
estimates would violate the assumption of normality re-
well control operations (12) (0.01)
quired for a standard ANOVA, the analyses were run on
fishing operations (100) (0.09) rank-transformed data (Conover and Iman, 1981). These
analyses determine, for each of the variables of interest,
severe weather (97) (0.08) whether there is a difference between groups, or if it is
rig repair (20) (0.02)
caused by the question format, or some interaction between
these two possibilities. Summary statistics for each group’s
logisitic delays (26) (0.02) performance on the four time measures are shown in Table
4, divided by packing condition.
Total 1,150 1.00

Table 3. Correlations between demographic variables and ranked time estimates.

Drilling Tripping Rigging Problems Procrastination Optimism Age Experience

Drilling - .001 .001 .001 .798 .222 .037 .083

Tripping .68 - .001 .001 .597 .574 .001 .003

Rigging .61 .57 - .001 .297 .957 .016 .025

Problems .55 .39 .57 - .057 .059 .491 .617

Procrastination .03 -.05 .10 .19 - .154 .150 .305

Optimism -.12 .06 -.01 -.19 -.14 - .060 .053

Age .21 .32 .24 .07 -.14 .19 - .001

Experience .17 .29 .22 .05 -.10 .19 .95 -

Note: values in the bottom left triangle are the correlation coefficients while those in the top right are the corresponding p-values (two-tailed in all cases). Signifi-
cant relationships (p < .05) are indicated by bold entries. N = 104 in all cases except age and experience, N = 102, and the age-by-experience correlation N = 100.

SECOND PROOF—WELSH 27 JAN 10 APPEA Journal 2010 50th ANNIVERSARY ISSUE—5

M. B. Welsh, N. L. Rees, H. A. Ringwood and S. H. Begg

GROUP DIFFERENCES
Differences between the groups were discovered for
three of the variables shown in Table 1, with another ap-
proaching significance. Specifically, age, experience and
rigging estimates differed significantly between the groups,
F(3, 92) = 9.59, 9.23 and 3.06, p < .001, .001 and p = .032,
respectively. Post-hoc Bonferroni analyses confirmed that
the industry group differed significantly from the third
year and fourth year groups in terms of age and from
all three other groups in terms of experience—being, un-
surprisingly, older and more experienced than the three
student groups. The differences between groups’ rigging
estimates, by comparison, were accounted for the differ-
ence between the third year and fourth year groups—as
was the near-significant difference in problem times, F(3,
92) = 2.44, p = .069.
Apart from this, however, the groups were fairly homo-
geneous, with no noticeable differences between their
time estimates and none between their scores on the per-
sonality measures.
EFFECT OF UNPACKING
Differences between participants’ scores according to
whether they had seen the packed or unpacked version of
the question were also assessed via the ANOVAs described
above. Only one of the eight ANOVAs showed a signifi-
cant result for unpacking—the one run for the estimates
of problem times. This found a highly significant effect,
with people who had seen the unpacked version making
estimates of problem times that were significantly longer
than those of participants who saw the packed version of
the question, F(1, 92) = 9.37, p =.003. This can be seen in
the data in Table 4, where, in all four groups participants
seeing the unpacked version of the question made estimates
of problem times noticeably larger than their equivalents
in the packed condition—an average of more than 100
hours difference across the four groups.
An additional effect of unpacking can be seen in Table
4; unpacking the problem estimation task, while increasing
the time attributed to problems, also seemed to reduce
the time allocated to the other aspects of the overall task.
Looking at the data one sees that, in 10 of the 12 cases,
the time estimates for the non-problem aspects of the task
were reduced in the unpacked condition, which a sign test
indicates is significant (p = .003). That is, while the overall
time estimates tended to increase in the unpacked condi-
tion, this effect was counteracted, to some extent, by the
tendency of people to reduce their estimates of the other
aspects of the task. Interestingly, the two cases where this
effect was not observed were in the estimates made by the
industry group (for tripping and rigging up).
INTERACTION EFFECTS
No significant interactions between group and unpack-
ing were observed in any of the eight ANOVAs. This can
be seen in Figures 1 and 2, which depict the relationships
between group and unpacking condition for the two time
estimation variables where a significant effect was found
for either group or form (rigging and problems). That said,
given the limited sample size and loss of power resulting
from the necessary use of ranked data, it is possible that
genuine, interaction effects simply have not been found.
Given this, there are patterns of results in Table 4 that
deserve comment. For example, the fact that the indus-
try group’s estimates of problems changed by more than
200 hours between the packed and unpacked conditions
(the largest change of any group) might be indicative of a
greater understanding of the nature of the problems given
in the unpacked list but, if so, this highlights the dangers
of the planning fallacy as the industry group’s estimates of
problem times in the packed condition were amongst the
lowest—less than half that of the fourth year group. The
implications of this are discussed in the effect of decision
training section below.
Effect of decision training
In addition to the hypotheses regarding group differ-
ences and the impact of unpacking condition, we were
also interested to see what impact decision training had
on time estimates and, in particular, whether this would

Table 4. Mean (and SD) time estimates by group and packing condition.

Task Condition Third year Fourth year Masters Industry

Packed 285.3 (601.3) 345.6 (417.2) 228.6 (112.9) 398.4 (112.9)
Drilling
Unpacked 249.1 (492.3) 305.8 (209.4) 179.7 (210.7) 333.8 (126.2)
Packed 24.0 (28.6) 84.1 (185.0) 51.1 (45.0) 56.1 (24.4)
Tripping
Unpacked 20.9 (25.7) 78.6 (119.5) 36.6 (37.6) 61.1 (27.3)
Packed 22.3 (20.2) 139.0 (278.3) 51.4 (30.8) 70.4 (34.4)
Rigging up
Unpacked 20.4 (12.8) 112.5 (139.7) 77.4 (76.0) 74.2 (38.5)
Packed 50.3 (125.2) 139.8 (208.2) 93.1 (81.7) 65.7 (46.0)
Problems
Unpacked 113.4 (68.2) 270.9 (288.1) 161.4 (131.2) 267.1 (51.4)
Packed 381.9 (739.9) 708.5 (913.6) 424.3 (157.4) 590.7 (698.1)
Total
Unpacked 403.8 (563.4) 767.8 (544.2) 455.1 (379.9) 736.2 (616.5)
Packed 15 17 7 15
N
Unpacked 17 12 9 12

6—50th ANNIVERSARY ISSUE APPEA Journal 2010 SECOND PROOF—WELSH 27 JAN 10


have a differential impact on participants’ estimates of
problem time in the different conditions. To assess this,
we focussed on the differences between the third year and
fourth year groups as these were judged most similar on our
demographic variables but were sharply divided in terms
of whether they had received decision training—with none
of the third years and all but one of the fourth years having
done so. This was preferred to a more general division of
the sample into participants who had and had not received
decision training as it effectively controls for differences
Figure 1. Rigging estimates by group and unpacking condition.
Figure 2. Problem estimates by group and unpacking condition.
SECOND PROOF—WELSH 27 JAN 10
The planning fallacy in oil and gas decision making
in age, experience and personality variables and ensured
that the decision training referred to was uniform in its
content (as all of the fourth years had undertaken decision
training in the same university course).
To confirm that the two groups did not differ significantly
on any of the four predictor variables (age, experience,
procrastination and optimism), independent samples t-tests
were conducted, finding no significant differences between
the groups—although the difference in age approached
significance, t (59) = 1.81, p = .075, as one would expect
with groups from different year level cohorts.
The effect of decision training on predictions of prob-
lem time under each of the unpacking conditions was as-
sessed using a 2x2 ANOVA on the ranked problem time
data. This analysis found that both decision training and
the question format affected estimates of problem time
significantly and in the expected manner. That is, people
who had had decision training estimated greater lengths
of time for problems, F(1, 57) = 6.22, p = .016, as did people
who saw the unpacked version of the question, F(1, 57) =
24.53, p < .001.
No interaction between the two factors was observed,
however, as Figure 3 shows. That is, looking at Figure 3,
one can see that each of the factors (decision training and
unpacking condition) affects estimates of problem times
but each does so largely independently of one another—
as indicated by the fact that the lines are near parallel.
(NB: while plotting category values connected by lines
is technically incorrect, this is the traditional means of
demonstrating interaction effects in ANOVA results so
this convention is used here.)
More evidence for the potential benefits of decision
training was noted above—in the fact that the group with
Figure 3. Mean estimates of problem times by unpacking condition
and decision training.
APPEA Journal 2010 50th ANNIVERSARY ISSUE—7
M. B. Welsh, N. L. Rees, H. A. Ringwood and S. H. Begg

the highest estimates of problem time, in the packed condi- DISCUSSION

tion, was the fourth years. That is, having previously been
made aware of the packing/unpacking bias and its relevance
to the planning fallacy, this group made estimates for the
packed category that were approximately double those
made by the remaining three groups. This, combined with
the observation made above regarding the strength of the
packing effect on estimates made by the industry group,
strongly argues for a benefit in providing such training.
Comparison with analogue
As a final test of our participants’ estimates we com-
pared their results, divided according to group and packing
condition, with the values calculated from the real world
analogue to our problem. This test was included to avoid
the criticism that a manipulation, such as unpacking, that
causes people to increase their time estimates is only useful
if people are, prior to unpacking, underestimating. That
is, before claiming that unpacking reduces the planning
fallacy, we must demonstrate that people in fact commit
the planning fallacy in the task we are using. Thus, differ-
ences between participants’ estimates and the real world
analogue values are included as Table 5 so as to enable
performance in our experimental conditions to be com-
pared to observed results from the real world.
Looking at Table 5, perhaps the clearest result is that the
total estimates made by our participants are significantly
less than the values from the analogue—by 382.2 hours
in the best case and as much as 768.1 hours in the worst.
Of the other results, it seems that participants were fairly
accurate in their estimates of drilling times but greatly
underestimated the times for the other tasks relative to
the analogue. The largest errors, as would be expected, are
seen in the estimated problem times in the packed condi-
tion. Of the groups, the fourth year and industry groups
are clearly the best performers, with estimates hundreds
of hours closer to the observed values than those made
by the third year and masters groups.
Overall, for the 32 time estimate comparisons (group by
task by condition) 28 show underestimation by participants
relative to the real-world base line. A sign test shows this
to be highly significant, p < .001, indicating that all of our
groups do seem to be falling victim to the planning fallacy
under both conditions.
Overview
The data presented above offer significant support for
a number of our hypotheses and shed some light on the
remainder. The hypotheses are discussed individually be-
low, in terms of the degree of support that the data offer
for them and any possible confounds.
HYPOTHESES
Hypothesis 1 (H1): People in the unpacked condition will
estimate longer times for problems associated with drilling
There is clear evidence that unpacking the problem
category into its constituent parts increases the estimates
of total problem time made by our participants; this is
observed both generally and in all four groups. Differences
between estimates made by participants in the packed
and unpacked conditions varied from around 60 hours to
more than 200 hours across the four groups.
Hypothesis 2 (H2): People in the unpacked condition will
estimate longer completion times for the drilling task
The data show that, both overall and within each group,
people in the unpacked condition did, in fact, estimate
longer completion times for the overall drilling task. The
difference between estimates in the packed and unpacked
conditions, however, ranged from relatively minor (~22
hours in the third year group) up to quite large (~145 hours
in the industry group). Overall, the differences were not
statistically significant but the pattern of results seems
fairly clear, with unpacking the problem category into
its subcategories increasing the overall completion time
estimates.
The fact that this effect was not significant, however, de-
serves some additional discussion. While there are sample
size considerations (as will be discussed in the limitations
section below), the main reason for this effect not reach-
ing statistical significance seems to relate to the way in
which people react to estimation tasks like the one used
herein. Specifically, it seems that people, while influenced
by the unpacking to add weight to the problems category,
in some sense have a global estimate that they are divid-

Table 5. Difference between real world and estimated times by group and packing condition.

Task Condition Third year Fourth year Masters Industry

Packed -14.7 45.6 -71.4 98.4
Drilling
Unpacked -50.9 5.8 -120.3 33.8
Packed -176 -115.9 -148.9 -143.9
Tripping
Unpacked -179.1 -121.4 -163.4 -139.9
Packed -227.7 -111.0 -199.6 -179.6
Rigging up
Unpacked -229.6 -137.5 -172.6 -175.8
Packed -349.7 -260.2 -306.9 -334.3
Problems
Unpacked -286.6 -129.1 -238.6 -132.9
Packed -768.1 -441.5 -725.7 -559.3
Total
Unpacked -746.2 -382.2 -694.9 -413.8

8—50th ANNIVERSARY ISSUE APPEA Journal 2010 SECOND PROOF—WELSH 27 JAN 10


ing up amongst the available categories. Thus, in order to
increase the total time assigned to problems, they reduce
the weight assigned to the other categories. While this
correction is not enough to undo the effect of unpacking
entirely, it is enough to reduce the difference between the
packed and unpacked estimates to a point where statistical
significance is harder to obtain given our samples sizes
and statistical tests.
Hypothesis 3 (H3): All four groups will be affected by the
planning fallacy
While H1 and H2 refer specifically to the effect of pack-
ing/unpacking, H3 refers, instead, to whether the groups are
seen to display the planning fallacy—that is, whether their
estimates are lower than the true time taken to complete
the task under discussion. Thus the relevant results are
those comparing participants’ estimates with the real-world
data; and this comparison supports the hypothesis. That
is, both overall and considering each component sepa-
rately, people tended to underestimate times relative to
the real-world baseline. In general, then, it seems safe
to conclude (bearing in mind the caveats regarding our
analogue discussed below) that our participants were af-
fected by the planning fallacy, regardless of which group
or condition they were in.
Hypothesis 4 (H4): Decision training will lessen
susceptibility to the planning fallacy
The comparison between the third and fourth year
groups described above tested for the impact of decision
training on the strength of the planning fallacy and un-
packing effect.The results indicated that decision training
did, in fact, significantly reduce the effect of the planning
fallacy—with the fourth year group making estimates that
were significantly longer (and thus closer to the real-world
values) than those of the third year group—in every case
(i.e., each combination of condition and task). Statistical
analyses also, however, indicated that both groups were
affected by the unpacking manipulation. That is, while
participants with decision training provided estimates
of problem time in the packed condition that were sig-
nificantly better than those made by participants without
decision training, both groups reacted in the same way
to the Problem task being unpacked into its constituent
parts­—by increasing the amount of time allocated to it.
Thus, the conclusion is that decision training has a sepa-
rate effect from the unpacking effect and that both can
be used to reduce susceptibility to the planning fallacy.
The fact that the industry group, who had the second
highest rate of decision training, showed no such benefit
in terms of their packed condition estimates of time does,
however, need some explanation. A possible reason is that
the decision training referred to (remembering that this
group’s training was not uniform) may not have included
specific reference to the planning fallacy. Another likely
reason is that the benefit of decision training has been
observed to erode over time (Welsh et al, 2005) and thus
SECOND PROOF—WELSH 27 JAN 10
The planning fallacy in oil and gas decision making
many of the industry personnel while having previously
taken decision training may no longer have retained any
benefit from it.
Hypothesis 5 (H5): Optimists will tend to estimate shorter
times for problems associated with drilling
The relationship between individual optimism scores
and estimates of problem time in the data were weak but
the correlation observed between these two variables was
in the predicted direction, r (102) = -0.19, and approached
significance, p =.059, when considered as a two-tailed test
(that is, testing for a difference in either direction). Given
the fact that our hypothesis predicts the direction of the
relationship, however, we can conclude that the effect
is significant if considered as a one-tailed test, p = .030
(half the two-tailed probability). That said, the observed
relationship is very weak—a correlation of -0.19 indicat-
ing that one variable explains ~3.6% of the variance in
the other. While it is possible that the correlation would
be increased if we considered a broader cross-section of
people (with a commensurately wider range of optimism
scores), the uniformity of our sample across groups seems
to indicate that our sample is fairly representative of the
oil industry itself and thus one should probably conclude
that optimism is not going to prove a useful predictor of
estimates of problem times.
Hypothesis 6 (H6): Procrastinators will tend to estimate
shorter completion times for the drilling task
By comparison, no statistical evidence was found linking
individuals’ procrastination scores with the overall time
estimates for the drilling task as a whole. The only result
that approached significance was between procrastination
score and problem time, r (102) = 0.19, p = .057, indicating
that people who scored highly on the procrastination scale
actually tended to predict more time for problems. This
relationship is in the opposite direction to that predicted
and might be interpreted as procrastinators being adept
at generating reasons to put off a task­—the assumption
being that potential problems are a reason not to start a
task. That said, as was the case with optimism, the strength
of this relationship is very weak and thus its potential as
a predictor of people’s behaviour is limited.
Implications
Overall, the results have clear implications for oil and gas
decision making. A primary observation is that oil industry
personnel, making decisions of a type they can reasonably
be expected to understand, are subject to the planning
fallacy—tending to make estimates of completion times
that are far shorter than real-world data indicates. This
was seen in all four of our groups, indicating that this is a
general tendency not removed by greater experience—an
observation reinforced by the fact that the group least af-
fected by the planning fallacy was the fourth year group
who had the second least industry experience of the groups.
APPEA Journal 2010 50th ANNIVERSARY ISSUE—9
M. B. Welsh, N. L. Rees, H. A. Ringwood and S. H. Begg
Equally important are the twin observations that
both decision training and utilisation of the unpacking
strategy reduce the strength of the planning fallacy. The
clear difference between the otherwise similar third and
fourth year groups seems to strongly support the idea that
knowledge of the planning fallacy (and potential mecha-
nisms for reducing it) does provide a benefit in terms of
reduced susceptibility to this bias. Similarly, the results
clearly indicate that unpacking a general category into its
constituent parts helps people reduce the impact of the
planning fallacy on their estimates (as argued by Kruger
and Evans, 2004).
Thus, it would seem to be in the interests of the industry
to institute decision training to make personnel aware of
the planning fallacy, its effect and possible consequences.
Additional training in specific debiasing strategies such
as unpacking general categories would further reduce the
effect of the planning fallacy and greatly improve industry
forecasts. This is of particular importance given the pat-
tern of results described above—where unpacking had
its greatest effect on the estimates made by the industry
group. This implies that, while industry experience does
not help avoid the planning fallacy when general catego-
ries are presented, once an unpacking process has been
initiated, industry experience allows more appropriate
time estimates to be generated for these subcategories.
That is, the benefit of unpacking will be greatest for those
people with greater knowledge to draw upon.
A final observation regarding the implications of the
findings described above relates to the global nature of
time estimates discovered herein. The fact that people’s
estimates of problems increased when this category was
unpacked was predictable, but the observation that this
often resulted in a reduction in the time estimates relating
to other aspects of the overall task has implications for the
use of unpacking as a debiasing technique for the planning
fallacy. Clearly, this implies that people may have a global
impression of how long the entire task will take and then
divide this among the available categories with the result
that unpacking one category reduces the weight available
to the other categories. That said, this global impression is,
itself, amenable to alteration, as in the unpacked condition
we did still see an overall increase in time estimates for the
complete task. A reasonable assumption might thus be that
the global impression is formed from a combination of a
person’s knowledge and the sheer number of categories in
need of estimates. Thus, while unpacking a single category
tends to reduce the weight assigned to other categories,
this also increases the global time estimate. This effect
must, clearly, be borne in mind when undertaking actions
designed to reduce the planning fallacy.
Limitations
As is always the case with laboratory research, there are
a number of caveats that must be kept in mind when exam-
ining our results. Firstly, we must consider the relatively
small numbers of participants in our groups (the masters
group in particular). While this is unlikely to have resulted
in any false positives in our statistics—as NHST techniques
10—50th ANNIVERSARY ISSUE APPEA Journal 2010
account for sample size in determining p-values—it is pos-
sible that this may have resulted in false negatives, where
we have failed to find an effect that does exist. Looking at
our data, it seems likely, for example, that a more powerful
(in statistical terms) analysis would probably have found
a statistically significant interaction between group and
packing condition whereby the industry group was more
strongly affected by the unpacking of the problem category.
Similarly, it seems likely that somewhat larger sample
sizes would have confirmed the effect of optimism (H5)
and procrastination (H6) on time estimation as discussed
above (although the effect size would remain very small)
and confirmed an overall effect of packing on total time
estimates (H2).
A second problem lies in the distribution of the data
and the types of NHST testing that this necessitated. As
noted throughout, time estimation data is not normally
distributed (a common assumption for parametric NHST
tests) and so non-parametric equivalents had to be used.
These tests, while avoiding the assumptions about data
distributions, have less statistical power and thus are less
likely to find a significant difference than their parametric
equivalents.Thus, combined with the sample size considera-
tions noted above, the necessity of using non-parametric
tests increases the likelihood of false negatives.
A third, potential problem lies in our analogous data.
While this was taken from a real-world example (that was
used to construct our scenario), in order to produce a work-
able question for our participants there were a number
of differences between the real well and the hypotheti-
cal one in terms of the included tasks. As such, we had
to adjust the analogue’s times to account for these dif-
ferences. Thus, while the results described above can be
considered indicative of likely differences between real
and estimated times, they certainly could not be argued to
measure such precisely. Additionally, the analogue, while
chosen to be representative of the situation described to
participants, represents a single observation from the real
world rather than an average across a variety of similar
wells. As such, it may be that this well is less typical than
we would hope and that similar wells might take more or
less time on average than indicated by this data; or that
the breakdown of time per task is unusual.
Finally, we must consider the fact that the estimation
task used herein, while based on real data, required our
participants to make their estimates based on far less data
than they would, in the course of their jobs, have available
to them. The idea that greater certainty about the specific
details of the well in question would reduce susceptibility
to the planning fallacy, however, is questionable at best.
If anything, given Buehler et al’s (1994) inside/outside
distinction, one would, in fact, expect the opposite—with
more specific details leading to an increase in the strength
of the planning fallacy.
Future research
Our findings point to a number of potentially fruit-
ful lines of research regarding the planning fallacy. For
example, the idea of initial global estimates and their
SECOND PROOF—WELSH 27 JAN 10

dependence on the number of categories made available
to a person during an estimation task is one that seems
amenable to experimental confirmation. That is, we could
test the extent to which varying the initial number of cat-
egories affects an individual’s overall estimates of time,
cost, etcetera.
Additional work with a larger sample could also estab-
lish whether the patterns of results discussed above that
failed to reach statistical significance do, in fact, reflect
underlying relationships; it is possible that we simply
failed to find such relationships due to limited statistical
power resulting from our sample sizes and use of non-
parametric tests. With a larger, industry sample, it might
also be possible to divide the sample into groups accord-
ing to their level of experience and thereby tease out, in
greater detail, the effects of experience on susceptibility
to the planning fallacy.
Finally, while we found no clear evidence of impact of
personal traits on susceptibility to the planning fallacy or
debiasing through unpacking of categories, it should be
noted that our analyses, in terms of individual differences,
was extremely limited and it may be worthwhile consider-
ing the impact of a wider range of individual traits. For
example, it might be effective to use the Big 5 personality
measures from the NEO PI-R (Costa and McCrae, 1992),
or to assess the relationship between the planning fallacy
and differences in specific intelligence measures such as
those described by the Cattell-Horn-Carroll model of in-
telligence (Carroll, 1993).
Conclusions
Despite the limitations discussed above, it seems clear
that our experimental results support the idea that oil and
gas industry personnel are affected by the planning fallacy
when estimating completion times and that this effect can
be ameliorated by both: training in decision making that
makes clear how and why the planning fallacy occurs; and
specific debiasing through unpacking of general categories
into subcategories. Uptake of this information offers the
potential to greatly improve the accuracy of forecasting
within the industry, preventing adverse outcomes in the
form of unexpected delays and cost growth.
Specifically, the accuracy of estimates of costs, time,
etcetera, are likely to be greatly improved if a project’s
constituents are clearly enumerated prior to any estimates
being made—rather than relying on a simple, mental sce-
nario of how the project seems likely to unfold—as it has
been clearly demonstrated that outcomes and possibilities
that are out of sight are also out of mind.
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THE AUTHORS
Matthew B.Welsh has a BA(Hons) in
philosophy and a BSc(Hons) and PhD
in psychology, all from the University
of Adelaide. He has been employed
as a research fellow in the Improved
Business Performance Group at the
Australian School of Petroleum for
the past six years, conducting research
focussing on the psychological aspects
of decision making and the impact that these can have on the
accuracy of forecasts and thus economic outcomes. Member:
SPE, Cognitive Science Society and Association for Psychologi-
cal Science.
Nigel Rees completed his BPetEng
(Hons) in geology and geophysics at
the Australian School of Petroleum in
2009. He is employed as a research
assistant for the Lake Eyre Basin
Analogues Research Group conduct-
ing research on the geomorphology
and sedimentology of large mud-
dominated rivers and floodplains in the
Channel Country, Central Australia. Nigel is also employed
as a junior field engineer with Baker Atlas. Member: SPE,
Engineers Australia and PESA.
SECOND PROOF—WELSH 27 JAN 10
The planning fallacy in oil and gas decision making
Hugh Ringwood completed his
BPetEng (Hons) at the Australian
School of Petroleum in 2009. He is
undertaking a junior field engineer
internship with Baker Hughes-Baker
Atlas. Hugh is also employed as a
research assistant at the University
of Adelaide, Australia, as part of the
Lake Eyre Basin Analogues Research
Group (LEBARG). Member: SPE, PESA and Engineers Australia.
Stephen (Steve) H. Begg has a
BSc and PhD in geophysics from the
University of Reading, England. He is
a Professor of Petroleum Engineering
and Management at the University of
Adelaide, Australia, focussing on deci-
sion making under uncertainty, asset
and portfolio economic evaluations,
and psychological factors that impact
these. Formerly, he was the director of strategic planning and
decision science with Landmark Graphics. Prior to that he held
a variety of senior operational engineering and geo-science
roles for BP Exploration, and was a reservoir characterisation
researcher and manager for BP Research. Steve has been an
SPE Distinguished Lecturer and has Chaired several SPE Forums
and Advanced Technology Workshops related to his areas of
expertise. Member: SPE and AAPG.
APPEA Journal 2010 50th ANNIVERSARY ISSUE—13
M. B. Welsh, N. L. Rees, H. A. Ringwood and S. H. Begg

14—50th ANNIVERSARY ISSUE APPEA Journal 2010 SECOND PROOF—WELSH 27 JAN 10

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