How shifting risk perception and amplified regret can impede innovation under threat

Either through intentional disruption or as a consequence of incidental shocks, market conditions are constantly changing. To remain competitive, businesses often need to adapt to such changes by innovating products and business models. However, while businesses seem to have less problems with innovation when they are confronted with opportunities, events that are seen as threatening decrease decision makers’ willingness to innovate. In the scientific literature, this phenomenon has been labeled Threat Rigidity. We take a psychological perspective to investigate how threats and opportunities affect two facets of innovation.

First, the outcomes of innovation decisions are to a large extent uncertain. While innovation is often seen as the riskier option, maintaining the status quo can be associated with considerable risks as well. If business decision makers face a threat, the impending losses typically trigger more risk-seeking decisions. Therefore, threats should even promote innovation. However, the findings from our experiments indicate that risk perceptions shift depending on the type of event a decision maker faces. Specifically, innovation is less often seen as the riskier option if the event is categorized as a threat. Consequently, shifting risk perceptions interfere with risk seeking under threat and potentially contribute to Threat Rigidity.

Second, innovation requires an active deviation from the status quo. As outlined above, the outcomes of both, deviating and maintaining the status quo can be uncertain. Due to this uncertainty, decision makers tend to compare the outcomes of different choices under specific circumstances, which can induce anticipations of regret. Our findings further suggest that threats amplify anticipated regret which then also impedes innovation.

Taken together, these findings improve our understanding of a central challenge for business management by shedding light on some fundamental psychological processes. In our (forthcoming) NIM Research Report, we outline managerial implications, discuss limitations of our findings and suggest directions for future research.