This is a story of investigations done throughout the world and they all have the same outcome. The unanimous result was so astonishing that the man who measured it, Dan Kahneman, received the Nobel Prize in Economy in 2002, although he was not an economist – he was a “shrink”! The following example is the basis for what was later called the Prospect Theory explaining the behavior mentioned above.
Let us draw a picture where the X-axis depicts the objective state of a situation, i.e. whether you de facto gain or lose something in a certain situation. It is illustrated by bags of coins, gains to the right and losses to the left, see fig 1.
The Y-axis depicts the subjective state, i.e. how happy or sad you will get, we could say that one happy face means 1 week of joy and two sad faces means 2 weeks of sorrow. Kahneman found a relationship between the two states. For instance if you lose 1 bag of coins, you will be sad for 3 weeks. Illustrated in fig.2.
Now the question comes – if you would gain instead of lose 1 bag of coins, will you then be happy for 3 weeks too? The answer is No. As you see the curve is quite asymmetric. Winning 1 bag of coins will make you happy for 1.8 weeks, winning 2 bags make you happy for 2.6 weeks and only after 3 weeks will you compensate for the loss of 1 bag by experiencing 3 weeks of happiness (if money can give you happiness…) This means in a gaming situation facing a real loss, the gain must overrule the possible loss by approximately 3 times for you to take action.
If it wasn’t a real loss, but just for fun, e.g. if we would play “coin toss” and we would play 5 times on a bet of 1€, you are likely to agree to take the challenge to play with me. But if I would raise the bet to 1000€ you would not join in as the bet could mean a real loss. Even if I would say that you only have to put 1000€ at stake when I put in 2000€ very few people would still join in, although this is logical lunacy. Of course everybody ought to join in – it’s a no- brainer when looking at the statistics. First when I overcompensate by putting 3000€ against your 1000€ in each round , you (and most people that could afford it) would – reluctantly – join in, because the odds are so favorable.
This phenomenon has implications on risk management in innovation situations too. It strongly indicates that it may actually be better to frame your idea/change proposal to your boss as an antidote to an existing threat that otherwise would cause a loss rather than framing it as a new business opportunity. Sometimes it may be better to pocket your pride and state that what you present is mainly not something new and unproven, but rather you focus on the known components and state that your proposal is not really new at all. It may look new – but most individual components are relatively old, reliable parts that have been tested earlier on the market successfully and only some are really new or maybe it is mainly the combination of the parts that is new. Then you lower the acceptance hurdle….and you have a higher chance of getting your proposal through. And finally, it’s the result that counts – isn’t it?
By Bengt Järrehult
Bengt Järrehult is Fellow Scientist Innovation at SCA, a global hygiene products and paper company. He is also adjunct professor and visiting professor resp. at 2 departments of Lund University in Sweden. He is an avid reader of and presenter on the topics of innovation, especially on breakthrough innovation and the psychological hurdles that exist to achieve this, hurdles that we may or may not be aware of. He is of the opinion that most companies more or less know what to do to become more innovative. What they don’t know is what really hinders them from doing these measures…