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.
The authors gratefully acknowledge the financial support of the National Science Foundation through its SciSIP Program (Award SBE-1561257). The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Richard T. Carson & Joshua Graff Zivin & Jordan J. Louviere & Sally Sadoff & Jeffrey G. Shrader, 2022. "The Risk of Caution: Evidence from an Experiment," Management Science, vol 68(12), pages 9042-9060.