The Psychology of Cost Estimating

Cost estimation for large (and even not so large) government programs is a challenge. The number and magnitude of cost overruns associated with large Department of Defense (DoD) and National Aeronautics and Space Administration (NASA) programs highlight the difficulties in developing and promulgating accurate cost estimates. These overruns can be the result of inadequate technology readiness or requirements definition, the whims of politicians or government bureaucrats, or even as failures of the cost estimating profession itself. However, there may be another reason for cost overruns that is right in front of us, but only recently have we begun to grasp it: the fact that cost estimators and their customers are human. The last 70+ years of research into human psychology and behavioral economics have yielded amazing findings into how we humans process and use information to make judgments and decisions. What these scientists have uncovered is surprising: humans are often irrational and illogical beings, making decisions based on factors such as emotion and perception, rather than facts and data. These built-in biases to our thinking directly affect how we develop our cost estimates and how those cost estimates are used. We cost estimators can use this knowledge of biases to improve our cost estimates and also to improve how we communicate and work with our customers. By understanding how our customers think, and more importantly, why they think the way they do, we can have more productive relationships and greater influence. By using psychology to our advantage, we can more effectively help the decision maker and our organizations make fact-based decisions.