Even the most rational and level-headed entrepreneurs are at risk of becoming emotionally attached to their ideas and undervaluing others’ strong investment potential. Hooshangi et al.’s “The Impact of Idea Generation and Potential Appropriation on Entrepreneurship: An Experimental Study” demonstrates how the act of generating ideas can cloud judgment and make innovators undervalue outsider solutions.
Some participants were prompted to design a specific business solution, which resulted in three different types of people:
- people evaluating their own ideas;
- people who had an idea but were evaluating someone else’s, and
- people with no original ideas who evaluated the ideas of others.
The bottom line is this: idea generating participants invested nearly twice as much in an idea if it was their own, regardless of the idea’s objective quality judgment.
Other idea generators invested nearly double in unknown ideas than in known ones. In theory, investors with ideas based their expectations of unknown idea quality on the inflated opinions of their own ideas, and overall considered these stronger than the potential investments with which they were presented. One arm of the study accounted for the threat of someone else investing in a skipped idea; however, this had surprisingly little effect. The most accurate and fruitful decisions across the board were those of investors who were not idea generators.
The study’s analysis suggests that loosening restrictions on intellectual property might result in greater market diversity and innovation; if all entrepreneurs believe their solution to be the best, they will branch off to create their own firms and seek investment from those who can be convinced of their idea’s value. However, entrepreneurs should be aware of their tendency to lower expectations of valuable innovators. Though they may consider themselves experts in their fields, they can undervalue good workers and put too much pressure on themselves to handle on projects, fearing that others will not give due respect to their innovations.
Entrepreneurs are open to the same psychological pitfalls as all decision makers. A question unanswered by the research was why entrepreneurs are driven to invest in unknown ideas, and discoveries may reveal the process between waiting for the “next big thing”. Future research would also create an objective measure for regret of losing investments to another investor.
Contributed by Abigail Hintermeister.