It is a widely held belief that having a risk-taking personality is essential for entrepreneurs. Take Mark Pincus, the billionaire co-founder of video game developer Zynga, for example. Freeloader, his first startup, was on the verge of going bankrupt when he rejected an investor who wanted to hand-pick the next CEO of the company. Pincus’ gamble was successful and he sold the company for millions a few months later. Most of these gambles fail, of course, but successful entrepreneurs do not get disheartened. Instead, they try again.
Surprisingly, the risk-taking behavior of Pincus is more the exception than the rule in the video game industry. Successful video game developers are notoriously risk averse. They prefer to exploit established franchises for decades while they ignore innovation unless it becomes necessary to survive later. Situmeang et al. provide an explanation for this widespread risk aversion in such a dynamic, technology driven industry in their recent study.
The authors analyzed the behavior of 362 video game developers over 8 years to see how their business decisions were influenced by two types of performance feedback: expert reviews and sales. According to their findings, the latter was the driving force behind risk aversion. Financially successful developers focused on the risks of entering a new market and avoided them by exploiting their previous successes with prequels, sequels and other related products. Predictably, financial failure turned the attention of developers to the opportunities new markets can offer and motivated them to invest in innovation and exploration.
Expert reviews had limited significance as long as sales expectations were met; however, their influence increased when sales figures were underwhelming. On the one hand, positive expert reviews encouraged the exploration of fundamentally new markets by increasing the confidence of developers and offering them an easier market entry due to their good reputation. On the other hand, negative or inconsistent expert reviews discouraged decision makers and they tried to decrease the risks of exploration by entering markets which were highly similar to the markets they were already familiar with.
The authors highlight two major implications of their findings. First, video game developers have a tendency to exploit success and slowly become the victim of it. Therefore, they need innovation managers who push for timely exploration even if it seems like an unnecessary risk at that time. Second, expert reviews deserve more attention in future analyses as they have an influence on the business decisions of video game developers.
To access the full paper, please click here.
Contributed by Bence Juhász.