Making predictions by identifying a reference class of similar past cases and using their actual outcomes (base rates) rather than focusing solely on your current situation.
Reference class forecasting combats the planning fallacy by forcing you to adopt the outside view—looking at how similar projects have actually fared rather than just analyzing your specific plan. Instead of estimating based on your detailed plan (inside view), you identify comparable past projects and use their average outcomes as your starting point. This approach is more accurate because it incorporates the actual track record of similar endeavors, including all the unforeseen obstacles and complications that typically arise. You then adjust from the base rate only if you have strong evidence that your situation is genuinely different.
Before estimating how long your home renovation will take, research how long similar renovations actually took for others in your area. If the average is 6 months with 40% running over a year, start with that base rate rather than your contractor's optimistic 3-month estimate.
Base rates don't apply to my unique situation—actually, everyone thinks their situation is unique; the power of reference class forecasting is precisely that it forces you to consider similarities rather than focusing only on differences.
What is the correct sequence of steps in reference class forecasting?
Your contractor estimates your kitchen renovation will take 3 months. You research similar renovations in your area and find they average 6 months, with 40% taking over a year. Using reference class forecasting, what should you plan for?
The slow, deliberate, effortful mode of thinking that allocates attention to complex computations, self-control, and conscious reasoning.
Mental ModelThe fast, automatic, intuitive mode of thinking that operates effortlessly and generates impressions, intuitions, and feelings without conscious control.
Mental ModelJudging the frequency or probability of events by how easily examples come to mind, leading to overestimation of vivid or recent events.
Mental ModelJudging probability by how much something resembles a typical case while ignoring base rates, sample size, and statistical principles.
Mental ModelThe tendency to rely too heavily on an initial piece of information (the anchor) when making subsequent judgments, even when the anchor is arbitrary or irrelevant.
Mental ModelThe principle that losses loom psychologically larger than equivalent gains, with losing something feeling roughly twice as bad as gaining the same thing feels good.
PrincipleA descriptive model of decision-making under risk showing that people evaluate outcomes relative to a reference point, are loss-averse, and weight probabilities non-linearly.
FrameworkSystem 1's tendency to construct the most coherent story possible from currently available information without considering what's missing or questions not asked.
PrincipleMaking predictions by identifying a reference class of similar past cases and using their actual outcomes (base rates) rather than focusing solely on your current situation.
Before estimating how long your home renovation will take, research how long similar renovations actually took for others in your area. If the average is 6 months with 40% running over a year, start with that base rate rather than your contractor's optimistic 3-month estimate.
Base rates don't apply to my unique situation—actually, everyone thinks their situation is unique; the power of reference class forecasting is precisely that it forces you to consider similarities rather than focusing only on differences.
Reference Class Forecasting is explored in depth in "Thinking, Fast and Slow" by Daniel Kahneman. Distilo provides a deep AI-powered analysis with key insights, audio narration, and practical frameworks.