Seven Cognitive “Sins”that may Hinder

Innovation at Your Firm

MTI2

www.mti2.eu

Sunk Cost Bias

In-Group Bias

Projection Bias

Availability Bias

#1

#3

#4

#5

Optimism Bias#6

Omission Bias#7

Confirmation Bias#2

sunk cost bias leads us to justify staying on the same track because of the resources already invested in that path

#1Sunk CostBias

may contribute to a tendency to ignore possibly beneficial changes in direction

*Source: Surowiecki, J. (2013), “That Sunk-Cost Feeling,” The New Yorker, January 21 [link]. Note: Sunk Cost Bias is sometimes called “the Concorde fallacy”.

“There was never a convincing business case for the supersonic airliner, and there were numerous attempts to kill it. But those attempts all failed, in large part because of the billions that had already been spent.”*

confirmation bias may promote innovation inertia

our tendency to cherry-pick information that fits our beliefs and expectations and ignore contradictory information

seeing and hearing information that justifies our current practices and ignoring contradictory evidence, may lead us to

stick to current business models and neglect new ideas #2Confirmation Bias

* Blockbuster went bankrupt in 2010 and Netflix is now a $28 billion dollar company, about 10x of Blockbuster’s value. See: “A Look Back At Why Blockbuster Really Failed and Why it Didn't Have to,” in Forbes, May 9, 2014.

“Neither RedBox nor Netflix are even on the radar screen in terms of competition. It's more Wal-Mart and Apple.”*

Quote from an interview by Blockbuster CEO Jim Keyes in 2008

in-group bias leads us to favor members of one’s in-group over out-group members

In innovation, this may lead innovation managers to neglect the opinions and input from employees. It may also lead firms to neglect input from external parties fostering a “not-invented-here” syndrome.

#3In-GroupBias

* Source: Huston, Larry, and Nabil Sakkab. (2006) "Connect and develop." Harvard Business Review 84, no. 3 : 58-66. [Link]

P&G wanted to tap into the creative thinking of inventors and others on the outside. They launched the 'connect & develop' program in 2001 to “move the company’s attitude from resistance to innovations ‘not invented here’ to enthusiasm for those ‘proudly found elsewhere.’”*

projection bias is our tendency to over-estimate the extent to which the future will resemble the present

#4Projection Bias

“By 2005 or so, it will become clear that the Internet’s impact on the

economy has been no greater than the fax machine’s.”

Paul Krugman, 1998

projection bias leads innovation decision-makers to engage in “naïve realism” and believe that trends will be less disruptive than they are. This impedes the development of new ideas.*

* Source: Jeanne Liedtka (2014), “Perspective: Linking Design Thinking with Innovation Outcomes through Cognitive Bias Reduction,” Journal of Product Innovation Management [Link]

availability bias is the human tendency to prefer what is familiar, easy to imagine and what comes easily to mind.

#5AvailabilityBias

because familiarity of an idea is typically inversely related to its novelty, this leads to a preference for incremental innovation ideas*. It also leads incumbent firms to discount the threat of emergent technologies**.

* Source: Jeanne Liedtka (2014), “Perspective: Linking Design Thinking with Innovation Outcomes through Cognitive Bias Reduction,” Journal of Product Innovation Management [Link]** Source: Gerard J. Tellis (2013), Unrelenting Innovation: How to Create a Culture for Market Dominance. San Francisco: Jossey-Bass.

In 1989, when Colby Chandler retired as Kodak’s CEO, the company had to choose a new CEO.

The choice was between Phil Samper (digital photography supporter) and Kay R. Whitmore

(who represented the traditional film business).*

The board chose Whitmore, in part because “Mr. Whitmore said he would make sure Kodak

stayed closer to its core businesses in film and photographic chemicals.”**

* Source: Chunka Mui (2012), “How Kodak Failed,” in Forbes, Jan 18. [Link]**Source: John Holusha (1989), “Click: Up, Down and Out at Kodak,” in New York Times, Dec 9. [Link]

Phil Samper Kay R. Whitmore

optimism bias is the human tendency to believe that one is less at risk of experiencing negative events than others.

#6Optimism Bias

This bias may lead to escalation of commitment and overcommitment to inferior ideas.

“Segway sales may hit $1 billion as fast as any company in history.* It will be bigger than the Internet**.”

John Doerr venture capitalist at Kleiner Perkins Caufield & Byers in Menlo Park, California.

* Source: Time Magazine (2009), “The 10 Biggest Tech Failures of the Last Decade,” May 14 [Link]

** Source: The Economist (2010), “Mr. Segway’s Difficult Path,” June 10 [Link]

omission bias is our tendency to judge harmful actions as worse than equally harmful omissions

#7OmissionBias

damage-provoking actions are easier to judge, and thus perceived as more damaging, than equally harmful inactions, hence leading to a tendency to avoid action

* Source: Christensen, Clayton M., Stephen P. Kaufman, and Willy C. Shih (2008), “Innovation Killers: How Financial Tools Destroy Your Capacity to Do New Things,” Harvard Business Review, Jan. [Link]. This may be compounded by “projection bias”, a tendency to project the present into the future (Lowenstein & Angner 2003).

Omission bias may lead to the following undesirable effects on innovation:

Managers may deem inaction as less risky than it actually is*

Employees may avoid action or sharing their innovative ideas with

hierarchical superiors due to fear of commission errors**

Firms may delay the termination of low performing innovation projects***

** Source: Markus Reitzig and Boris Maciejovsky (2014), “Corporate Hierarchy and Vertical Information Flow Inside the Firm – A Behavioral View,” Strategic Management Journal [Link].

*** Source: Dean A. Shepherd, Holger Patzelt, Trenton A. Williams, and Dennis Warnecke (2014), “How Does Project Termination Impact Project Team Members? Rapid Termination, ‘Creeping Death’, and Learning from Failure,” Journal of Management Studies, 51(4), 513-546 [Link].

*Source: Christensen, Clayton M., Stephen P. Kaufman, and Willy C. Shih (2008), “Innovation Killers: How Financial Tools Destroy Your Capacity to Do New Things,” Harvard Business Review, Jan. [Link]

“More often than not, failure in innovation is rooted in

not having asked an important questionrather than in having arrived at an incorrect answer”*

Debiasing: Three Strategies to Avoid these Cognitive Pitfalls

cognitive biases often exert their influence on judgment because people are unaware of their impact on judgments and decisions

Debiasing Strategy #1:Increase Awareness

increasing managers’ awareness about these effects helps reduce their impact*

* Source: Croskerry, P. (2003), “The importance of cognitive errors in diagnosis and strategies to minimize them,” Academic Medicine, 78(8) 775–780.

Debiasing Strategy #2:Decision Support Tools

most cognitive biases can be overcome by using appropriate decision tools and simple decision support systems*

* Sources: • Benbasat, I. and J. Lim (2000), “Information Technology Support for Debiasing Group Judgments: An Empirical Evaluation,” Organizational Behavior

and Human Decision Processes, 83(1), 167-183.• Kleinmuntz, D.N., and D.A. Schkade (1993), “Information Displays and Decision Processes,” Psychological Science, 4(4), 221-227.

Debiasing Strategy #3:Training

Cognitive biases can also be overcome with appropriate training, for instance on*:

(1) decision rules, (2) decision readiness, (3) problem representation, (4) uncertainty assessment and consideration, (5) other bias reduction techniques.

* Sources: • Arkes, H. R. (1991), “Costs and benefits of judgment errors: Implications for debiasing,” Psychological Bulletin, 110(3), 486–498.• Camacho, N., B. Donkers and S. Stremersch (2011), “Predictably Non-Bayesian: Quantifying Salience Effects in Physician Learning About Drug

Quality,” Marketing Science, 30(2), 305-320,• Soll, J. B., K. L. Milkman, and J.W. Payne (2015), “A User's Guide to Debiasing (forthcoming),” in Wiley-Blackwell Handbook of Judgment and

Decision Making, G. Keren and G. Wu (Eds.).

Seven Cognitive “Sins”that may Hinder

Innovation at Your Firm

MTI2

www.mti2.eu