Working Paper: NBER ID: w26847
Authors: Richard Carson; Joshua S. Graff Zivin; Jordan Louviere; Sally Sadoff; Jeffrey G. Shrader Jr.
Abstract: 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.
Keywords: Risk Preferences; Research and Development; Innovation; Decision-Making
JEL Codes: D81; G11; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| managers' risk preferences (D81) | funding decisions (I22) |
| risk-tolerant managers (G40) | choice of high-variance projects (G11) |
| emphasis on variance in project ratings (H43) | increased variance aversion (D81) |
| larger budgets (H61) | variance preference (D11) |
| financial scarcity (G59) | risk aversion (D81) |