Is your company biased against innovation?

Apr 3, 2012 by Christoph

At inudgeyou.com, we are more than happy to see an almost Kuhnian nudge revolution take place these days.

Quite frankly, nudge based on behavioural economics seems to be the current intellectual supernova. If we, contrary to our humble take on things, haven’t convinced you yet, then please take a look at this stunning figure showing prospect theory’s massive multidisciplinary influence since the 1979 publication of Kahneman and Tversky’s groundbreaking article wherein they first defined and outlined prospect theory (requires access).

Therefore, this intelligent analysis over at Harvard Business Review’s blog site hardly comes as a surprise to us. Branding expert David Aaker passes the multidisciplinary torch by combining a branding perspective with classic prospect theory:

”When given a choice between getting $1,000 with certainty, or having a 50% chance of getting $2,500, most people will choose the certain $1,000 — even though the expected value (the average value over repeated trials) of the uncertain option is $1,250. Most people would reject a gamble where they would gain $100 if a fair coin lands on heads, and lose $100 when the coin lands on tails, because losses have a much higher impact than gains.”

… There’s evidence that firms are no different. They overinvest in incremental innovation, and underinvest in innovations that would create “must haves” that would define new subcategories, which, with rare exceptions, are the only innovations that create real growth.”

Aaker is spot on by pointing out how good ol’ risk aversion prevents companies from real and substantial innovation. The argument need not be limited to the private sector since risk aversion occurs in all kinds of organizations, whether private or public.

We have no doubt that nudging will play a key part in discovering how to overcome risk aversion and the rest of the mental shortcuts in human decision making. Feel free to steal some potential solutions from the brilliant report MINDSPACE, published by the UK Institute for Government in 2011. You can find the report at our resource section here.

Finally, some concluding wise words from HBR’s David Aaker:

“Every firm needs a balanced portfolio. You can’t just support homeruns. However, some game changers need to be included, which means that biases against game changers need to be neutralized. Meaningful innovation needs to be supported, even when the odds appear to be stacked against you.”

How do your company handle the bias against innovation? How may this bias be turned to our advantage?