To fail or not to fail

With reference to the Nobel laureate Daniel Kahneman and Amos Tversky Tim Harford writes in the Financial Times that his New Year resolution is to risk more small losses – strange, isn’t it?

Kahneman is probably well known for his current bestseller Thinking, Fast and Slow. He and Tversky did ground breaking research in behavioural economics and decision making. One of their key papers and the one for which Kahneman received the Nobel prize is the “Prospect Theory: An Analysis of Decision under Risk” (1979). In short and of course simplified: people tend to be loss averse in a disproportionate way, passing up opportunities for big gains just to avoid small losses.

Back to Tim Harford and his New Year resolution:

I’ll be trying something new each month in 2013, and I’ll be fighting loss aversion all the way. I have a few plans. I’d like to write a short story, organise an intellectual salon, hire a personal trainer, learn to program and bake chocolate cake.

But the point is:

Some of these projects will remain firmly on the drawing board for the entire year. It simply does not matter because these losses are all small. And you never know: one of these days, one of these projects may turn out to be hugely fulfilling. That will justify all the failed experiments along the way.

And of course the same applies to the business world:

Far too often, new ideas are turned down because they will probably fail, without seriously asking whether the small chance of meaningful success might outweigh an inexpensive failure – even if that failure is highly likely.

So the question is: Are we willing to take some risks? Or are we so risk and loss averse that we miss out on quite a few good chances to be more successful?

Take innovation and business development. These are usually fields where you put in some resources while the outcome is highly uncertain. It is well known that especially big production companies e.g. in the pharmaceutical industry spend considerable amounts to develop new products.

But what about the service industry, smaller companies? What about your company?

Do you have somebody in charge for business development? Do you have a process in place that when a new idea comes up it is properly checked for its benefits, maybe tested on a small scale, perhaps in just one of your operations, with one segment of your customers?

It could be worthwhile to think of implementing business development in your organization. It need not cost a lot. It is more about picking up new opportunities in a structured and systematic way and not letting them pass by.

Picture by Enokson (Flickr)