Sta Hungry Stay Foolish

Stay Hungry. Stay Foolish.

A blog by Leon Oudejans

Why do we underestimate?

While watching the tv series The Catch (eg, IMDb), I suddenly wondered this: do we always underestimate? Our underestimations are usually about (i) whether we can trust someone, or (ii) how much space and/or time something takes (eg, LinkedIn, Medium, Quora, Tiny Buddha).

The answer may relate to the “problem-solving principle” Occam’s razor. It’s often wrongly described as “The simplest explanation is usually the best one.” (Wiki). Once we apply that principle, we can expect that we will underestimate. Not applying Occam’s razor implies excessive thinking.

Once someone asked me if I ever stopped thinking. His question was a surprise. I did not even realise that I did indeed. Hence, I usually overestimate people (eg, intentions). Consequently, people often disappoint me, and seldom exceed my expectations. Underestimation is not common for me.

Source: LinkedIn

The above diagram is an illustration of the cost of underestimation and of overestimation. I noticed it in a 2019 LinkedIn article by Balazs Hideghety. The cost of overestimation is lower and linear. The cost of underestimation is (much) higher and nonlinear. As a former CFO, I understand this.

There’s an intriguing rule of thumb in that LinkedIn article:

a good estimate should be within 25% of actual results 75% of the time

That rule of thumb resembles a famous principle by Italian polymath Vilfredo Pareto (1848-1923). Wiki: “The Pareto principle states that for many outcomes, roughly 80% of consequences come from 20% of causes (the “vital few”). Other names for this principle are the 80/20 rule [..] .”

“The penalties for underestimation are more severe than the penalties for overestimation, so, if you can’t estimate with complete accuracy, try to err on the side of overestimation rather than underestimation.”

A quote by Steve McConnell from his 2006 book Software Estimation, figure 3-1

a Punjabi song sung by Geeta Zaildar & Gurlez Akhtar, Deep Jandu (composer), Karan Aujla (writer)
lyrics, video

Note: all markings (bolditalicunderlining) by LO unless in quotes or stated otherwise.


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