Natural experiments

Natural experiment occurs when some exogenous event (e.g., government policy) changes conditions for some group. They are used to uncover “causal relationships,” and often require advanced statistical analysis. 

Angrist (1990) provides an example. This paper aims to estimate how military service affects lifetime earnings. It is often hard to estimate such effect directly because people without good working opportunities are usually more likely to serve in the military, so the lower-income is not “caused” by military service. 

The paper uses a government policy during the Vietnam War – eligibility for military service is “randomly” determined by the draft lottery using the dates of birth. In this case, it could guarantee that when conducting statistical analysis, all the other characteristics of the veterans and the non-veterans are comparable, so we can be sure that the difference in income is “caused” by the military service. The analysis shows that the earnings of veterans were, on average, about 15 percent less than the earnings of non-veterans.

Angrist, J. D. (1990). Lifetime Earnings and the Vietnam Era Draft Lottery : Evidence from Social Security Administrative Records. American Economic Association, 80(3), 313–336.

What causes the planning fallacy?

Generally speaking, there are two reasons why the planning fallacy happens. 

First, overconfidence. Overconfidence has been consistently observed among people. In terms of planning, people often make an optimistic estimate on the time and costs needed to finish a project. This is because it is easier to imagine a project goes well, and hard to anticipate all the possible obstacles and difficulties to be encountered along the way. 

Second, strategic misrepresentation by the government (planner). The government has incentives to deliberately underestimate the cost to get the project approved. It is easier to get forgiveness for overspending than permission for starting. Once the project starts, it is hard to stop, and the taxpayers may simply not monitor the eventual costs of the project. This situation is more serious when there are many departments/ministries in the government competing for the budget.