Innovation Decision under Uncertainty: How cognitive biases can help explain the imbalance of exploration and exploitation that leads to singular innovation trajectories?

Kit Shan Fung

Student thesis: Master thesis

Abstract

Research in innovation has long studied the balance and imbalance of exploration and exploitation with the consensus that a balance of both is necessary for the long-term survival of a business entity, a business of any size. The specialization of exploration or exploitation leads a business entity into a state of failure, success, or competence trap (a result of a singular innovation trajectory) that can render a business entity vulnerable to changes in the market. Innovation scholars have studied this phenomenon largely at an organizational level, therefore, an inadequacy exists in explaining the balancing mechanism in relations to the actual innovation decisions that balance or dis-balance the business entity. In decision making, one is bounded by limited information, time, and cognitive constraints. This research fills the gap by investigating the cognitive constrains known as cognitive biases—mental filters and short cuts that can mis-guide the assessment and decision process—at an individual level. This thesis links known behaviors found in singular innovation trajectories (trajectories with only exploration or exploitation) to culpable cognitive biases. In doing so, this thesis finds that overconfidence in one’s ability and over-optimism in the odds of favorable outcomes can cause errors in estimating the relative importance of cues and information processed during decision making. Therefore, the root cause of the imbalance is the cognitive biases that affect the accuracy of estimation and lead to such overconfidence and overoptimism. Moreover, this research also investigates cognitive biases’ role in the persistence of singular innovation trajectories. By understanding the role of cognitive biases in innovation decision making, this thesis is able to purpose a balancing mechanism based on managing the undesired effects of cognitive biases, thus, re-balancing the decisions on exploration and exploitation.

EducationsMSc in Management of Innovation and Business Development, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2013
Number of pages81