More Related Content More from Deloitte United States (20) 4 Behavioral Traps Innovators Should Avoid2. 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
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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
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