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4 Behavioral Traps Innovators Should Avoid

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As innovation climbs corporate agendas, the understanding of how it works and how it can be managed is struggling to keep pace. Learn four behavioral traps found in investing that could also impact innovators…and how to avoid them.

Download the full Deloitte Review article here: http://deloi.tt/2wgt4rY

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4 Behavioral Traps Innovators Should Avoid

  1. behavioral traps innovators should avoid
  2. 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.
  3. 3 Deloitte University Press | 4 behavioral traps innovators should avoid | @DU_Press #DeloitteReview Copyright © 2014 Deloitte Development LLC. All rights reserved. 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.
  4. 4 Deloitte University Press | 4 behavioral traps innovators should avoid | @DU_Press #DeloitteReview Copyright © 2014 Deloitte Development LLC. All rights reserved. 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.
  5. 5 Deloitte University Press | 4 behavioral traps innovators should avoid | @DU_Press #DeloitteReview Copyright © 2014 Deloitte Development LLC. All rights reserved. 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
  6. 6 Deloitte University Press | 4 behavioral traps innovators should avoid | @DU_Press #DeloitteReview Copyright © 2014 Deloitte Development LLC. All rights reserved. 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
  7. 7 Deloitte University Press | 4 behavioral traps innovators should avoid | @DU_Press #DeloitteReview Copyright © 2014 Deloitte Development LLC. All rights reserved. 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 choosing Trap 2: ?
  8. 8 Deloitte University Press | 4 behavioral traps innovators should avoid | @DU_Press #DeloitteReview Copyright © 2014 Deloitte Development LLC. All rights reserved. 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 Behavioral solution: Designing appropriate defaultoptions
  9. 9 Deloitte University Press | 4 behavioral traps innovators should avoid | @DU_Press #DeloitteReview Copyright © 2014 Deloitte Development LLC. All rights reserved. Investors should notworry 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
  10. 10 Deloitte University Press | 4 behavioral traps innovators should avoid | @DU_Press #DeloitteReview Copyright © 2014 Deloitte Development LLC. All rights reserved. Shift toward a portfolioview Focusing on the trees and ignoring the forest Behavioral solution: 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.
  11. 11 Deloitte University Press | 4 behavioral traps innovators should avoid | @DU_Press #DeloitteReview Copyright © 2014 Deloitte Development LLC. All rights reserved. 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 familiar Trap 4:
  12. 12 Deloitte University Press | 4 behavioral traps innovators should avoid | @DU_Press #DeloitteReview Copyright © 2014 Deloitte Development LLC. All rights reserved. Sticking with the familiar Behavioral solution: 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.
  13. 13 Deloitte University Press | 4 behavioral traps innovators should avoid | @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.
  14. 14 Deloitte University Press | 4 behavioral traps innovators should avoid | @DU_Press #DeloitteReview Copyright © 2014 Deloitte Development LLC. All rights reserved. Explore how innovators can learn from investors’ failures For more, download the Deloitte Review article Share your thoughts with the hashtag #DeloitteReview Follow @DU_Press on Twitter Download
  15. 15 Deloitte University Press | 4 behavioral traps innovators should avoid | @DU_Press #DeloitteReview Copyright © 2014 Deloitte Development LLC. All rights reserved. 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
  16. Follow @DU_Press Sign up for Deloitte University Press updates at www.dupress.com. About Deloitte University PressDeloitte University Press publishes original articles, reports and periodicals that provide insights for businesses, the public sectorand NGOs. Our goal is to draw upon research and experience from throughout our professional services organization, and that of coauthors in academia and business, to advance the conversation on a broad spectrum of topics of interest to executives and government leaders. Deloitte University Press is an imprint of Deloitte Development LLC. This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or its and their affiliates are, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your finances or your business. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. None of Deloitte Touche Tohmatsu Limited, its member firms, or its and their respective affiliates shall be responsible for any loss whatsoever sustained by any person who relies on this publication. About DeloitteDeloitterefers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/aboutfor a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright © 2014 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu Limited

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