Motivating Innovation: The Effect of Loss Aversion on the Willingness to Persist

Abstract

We investigate the willingness of individuals to persist at exploration in the face of failure. Prior research suggests that a “tolerance for failure” may motivate individuals to select more exploratory courses of action. Little is known, however, about how individuals persist at exploration when confronted by prolonged periods of negative feedback. To examine this question, we design a two-dimensional maze game to capture the essential trade-offs between exploration and exploitation, develop predictions for the game using computational models of reinforcement learning, and run a series of randomized experiments with human subjects in the game. Our methods extend beyond two-period models of decision-making under uncertainty to account for repeated behavior in longer-running, dynamic contexts. Our results suggest that individuals explore more when they are reminded of the incremental cost of their actions, a result that extends prior research on loss aversion and prospect theory. The results also suggest that behavioral factors may complicate innovation strategies that tolerate failure. We discuss implications for future research and managers.