The Risk of Caution: Evidence from an R&D Experiment

Innovation is important for firm performance and broader economic growth. But breakthrough innovations necessarily require greater risk-taking than more incremental approaches. To understand how managers respond to uncertainty when making research and development decisions, we conducted three experiments with master’s degree students in a program focused on the intersection of business and technology. Study participants were asked to choose whether to fund hypothetical research projects using a process that mirrors real-world research and development funding decisions. The experiments provided financial rewards that disproportionately encouraged the choice of higher-risk projects. Despite these incentives, most participants chose lower-risk projects at the expense of projects more likely to generate a large payoff. We also elicited participants’ personal risk preferences and found that decision-makers who are more tolerant of risk were more likely to fund breakthrough projects. The results suggest that the risk preferences of managers in charge of research investments may have an oversized effect on the rate of breakthrough innovation and the profitability of firms.

[1]  William S. Lovejoy,et al.  Equity Contracts and Incentive Design in Start-Up Teams , 2020, Manag. Sci..

[2]  J. Graff Zivin,et al.  The Effects of Prize Structures on Innovative Performance , 2020, AEA Papers and Proceedings.

[3]  John Van Reenen,et al.  Are Ideas Getting Harder to Find? , 2017, American Economic Review.

[4]  Danielle Li,et al.  Missing Novelty in Drug Development , 2018, The Review of Financial Studies.

[5]  Karim R. Lakhani,et al.  Looking Across and Looking Beyond the Knowledge Frontier: Intellectual Distance, Novelty, and Resource Allocation in Science , 2016, Manag. Sci..

[6]  Jordan J. Louviere,et al.  Best-Worst Scaling: Theory, Methods and Applications , 2015 .

[7]  Alex Imas,et al.  Experimental methods: Eliciting risk preferences , 2013 .

[8]  Marcus M. Keupp,et al.  The Strategic Management of Innovation: A Systematic Review and Paths for Future Research , 2011, International Journal of Management Reviews.

[9]  Bernard H. Munos,et al.  How to Revive Breakthrough Innovation in the Pharmaceutical Industry , 2011, Science Translational Medicine.

[10]  A. Marks Repaving the Road to Biomedical Innovation Through Academia , 2011, Science Translational Medicine.

[11]  D. Hirshleifer,et al.  Are Overconfident CEOs Better Innovators? , 2011 .

[12]  Gustavo Manso Motivating Innovation , 2010 .

[13]  Denzil G. Fiebig,et al.  The Generalized Multinomial Logit Model: Accounting for Scale and Coefficient Heterogeneity , 2010, Mark. Sci..

[14]  D. Teece Business Models, Business Strategy and Innovation , 2010 .

[15]  Pierre Azoulay,et al.  Incentives and Creativity: Evidence from the Academic Life Sciences , 2009 .

[16]  A. Tishler How risky should an R&D program be? , 2008 .

[17]  Daniel A. Levinthal,et al.  Exploration and Exploitation in Organizational Learning , 2007 .

[18]  A. Thakor,et al.  Overconfidence, CEO Selection, and Corporate Governance , 2006 .

[19]  Luís M. B. Cabral,et al.  R&D Competition when firms Choose Variance , 2003 .

[20]  R. Amit,et al.  Value creation in E‐business , 2001 .

[21]  E. Helpman General purpose technologies and economic growth , 1998 .

[22]  Luís M. B. Cabral Bias in market R&D portfolios , 1994 .

[23]  L. Thurstone A law of comparative judgment. , 1994 .

[24]  Beth E Allen,et al.  Choosing R&D Projects: An Informational Approach , 1991 .

[25]  E. Maskin,et al.  The Simple Economics of Research Portfolios , 1987 .

[26]  M. Porter Competitive Advantage: Creating and Sustaining Superior Performance , 1985 .

[27]  J. Hicks,et al.  The economics of science , 1996 .

[28]  Jordan J. Louviere,et al.  Design and Analysis of Simulated Consumer Choice or Allocation Experiments: An Approach Based on Aggregate Data , 1983 .

[29]  R. Merton,et al.  The Sociology of Science: Theoretical and Empirical Investigations , 1973 .

[30]  D. McFadden MEASUREMENT OF URBAN TRAVEL DEMAND , 1974 .

[31]  F. David,et al.  Statistical Estimates and Transformed Beta-Variables. , 1960 .

[32]  R. Luce,et al.  On the possible psychophysical laws. , 1959, Psychological review.

[33]  P. Moran On the method of paired comparisons. , 1947, Biometrika.

[34]  Alfred J. Lotka,et al.  The frequency distribution of scientific productivity , 1926 .