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Innovation Risk: How to Make Smarter Decisions
assessing the prospects of any new product requires modeling how it will be used. But that exercise has its limits. by Robert C. Merton

The Big idea

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The Big Idea
Assessing the prospects of any new product requires modeling how it will be used. But that exercise has its limits. by Robert C. Merton

2 Harvard Business Review april 2013

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april 2013 Harvard Business Review 3

This article is made available to you with compliments of FM Global Insurance. Further posting, copying, or distributing is copyright infringement. To order more copies go to www.hbr.org or call 800-988-0886.

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The Big idea InnovatIon RIsk: How to make smaRteR deCIsIons 4 Harvard Business Review april 2013

ew products and services are created to enable people to do tasks better than they previously could, or to do things that they couldn’t before. But innovations also carry risks. Just how risky an innovation proves to be depends in great measure on the choices people make in using it. vation—how it will change the trade-offs people make and their behavior—they must be mindful of the limitations of the models on which people base their decisions about how to use the innovation. As we’ll see, some models turn out to be fundamentally flawed and should be jettisoned, while others can be improved upon. Some models are suited only to certain applications; some require sophisticated users to produce good results. And even when people use appropriate models to make choices about how to use an innovation—striking the right balance between risk and performance—experience shows us that it is almost impossible to predict how their changed behavior will influence the riskiness of other choices and behaviors they or others make, often in apparently unrelated domains. It’s the old story of unintended consequences. The more complex the system an innovation enters, the more likely and severe those consequences will be. Indeed, many of the risks associated with an innovation stem not from the innovation itself but from the infrastructure into which it is introduced. The bottom line is that all innovations change the trade-off between risk and return. To minimize risk and unintended consequences, users, companies, and policy makers alike need to understand how to make informed choices when it comes to new products and services. In particular, they should respect five rules of thumb.

Ask yourself this: If you had to drive from Boston to New York in a snowstorm, would you feel safer in a car with four-wheel drive or two-wheel drive? Chances are, you’d choose four-wheel drive. But if you were to look at accident statistics, you’d find that the advent of four-wheel drive hasn’t done much to lower the rate of passenger accidents per passenger mile on snowy days. That might lead you to conclude that the innovation hasn’t made driving in the snow any safer. Of course, what has happened is not that the innovation has failed to make us safer but that people have changed their driving habits because they feel safer. More people are venturing out in the snow than used to be the case, and they are probably driving less carefully as well. If you and everyone else were to drive to New York at the same speed and in the same numbers as you did before, four-wheel drive would indeed make you a lot safer. But if you and everyone else were to drive a lot faster, you’d face the same amount of risk you’ve always had in a snowstorm. In essence, you’re making a choice (consciously or unconsciously)...
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