4 Behavioral Traps Innovators Should Avoid

behavioral traps
innovators
should avoid

2 Deloitte University Press | 4 behavioral traps innovators should avoid | @DU_Press #DeloitteReview Copyright © 2014 Deloitte Development LLC. All rights reserved.
There are two main factors that make meaningful investment in innovation harder to manage than other corporate activities:
Innovation is fraught with uncertainties
There is a tension between short term and long term
As innovation climbs corporate agendas, the understanding of how it works and how it can be managed is struggling to keep pace.

Persistent biases can often affect investment decisions. In practical terms, this means that people lose money by following their instincts. Behavioral finance looks at investment decisions and how investors process information.
Applying behavioral insights regarding investment to decisions about management reveals a new perspective on innovation.
Investors, of course, face the same challenges.

Underinvesting
Sticking with the familiar
Focusing on the trees and ignoring the forest
Choosing by not choosing
Behavioral finance suggests there are 4 behavioral traps thatcan impair investment decisions with particular relevance for innovation decisions.
The solutionsthat have been developed to address these behavioral traps in investing can help inform decisions about innovation.

Underinvesting
Trap 1:
Loss aversion often results in inertia, which suggests that resting wallets tend to stay at rest, even when it’s contrary to an individual’s self-interest
Investors tend to focus on the short term, underinvesting to the detriment of the long-term

Underinvesting
Behavioral solution:
Similar to automatic mechanisms for retirement investing, companies can shield their innovation budgets by committing to a certain level of R&D spending in the future, irrespective of the current business situation.
Provide mechanisms that help individuals planfor the future

People tend to lean toward a default option
If there is no default option, they become indecisive
Choice overload has two main effects on financial decision making:
Trap 2:
?

While innovation itself cannot be automated, innovation incentives and contexts can become institutionalized. In other words, innovative behavior in a company must become the default option.
Designing appropriate defaultoptions

Investors should notworry about the single securities in their portfolio; their only concern should be the bottom line
Trap 3:
That is, the risk and the performance of their overall portfolio

Shift toward a portfolioview
Similar to investors constructing a portfolio, innovation managers can construct a portfolioranging between high risk/high return and low risk/low return and manage the portfolio and its risk budget.

People have a strong tendency to stick with what they know, and they tend to rely on information that is easily available or recallable
Trap 4:

Cast your net widely
To avoid the familiarity bias, innovators need to diversify their sources of ideationin the same way investors need to diversify their investments.

Viewing innovation from a behavioral perspective can lead to more effective innovation processes and outcomes.

Explore how innovators can learn from investors’ failures
For more, download the Deloitte Review article
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Authors
DR. ALEXANDER BÖRSCH
director with Deloitte & Touche GmbH and head of research for Deloitte in Germany
NICOLAI ANDERSEN partner with Deloitte Consulting GmbH and Innovation leader for Deloitte in Germany

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4 Behavioral Traps Innovators Should Avoid

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4 Behavioral Traps Innovators Should Avoid