4 Behavioral Traps Innovators Should Avoid

behavioral trapsinnovatorsshould 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.

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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 that can impair investment decisions with particular relevance for innovation decisions.

The solutions that have been developed to address these behavioral traps in investing can help inform decisions about innovation.




UnderinvestingTrap 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

plan for 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:

Choosing by not choosingTrap 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.

Choosing by not choosing


Designing appropriate default options




Investors should not worry about the single securities in their portfolio; their only concern should be the bottom line

Focusing on the trees and ignoring the forest

Trap 3:

That is, the risk and the performance of their overall portfolio




Shift toward a portfolio view

Focusing on the trees and ignoring the forest


Similar to investors constructing a portfolio, innovation managers can construct a portfolio ranging 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

Sticking with the familiarTrap 4:




Sticking with the familiar


Cast your net widely

To avoid the familiarity bias, innovators need to diversify their sources of ideation in the same way investors need to diversify their investments.



13 Deloitte University Press | 4 behavioral traps innovators should avoid | @DU_Press #DeloitteReview Copyright © 2014 Deloitte Development LLC. All rights reserved.@DU_Press #DeloitteReview Copyright © 2014 Deloitte Development LLC. All rights reserved.

Viewing innovation from a

behavioral perspective can

lead to more effective

innovation processes and

outcomes.






Explore how innovators can learn from investors’ failures

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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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Leadership & Management

4 Behavioral Traps Innovators Should Avoid