Risk aversion on the part of R&D managers can damage US economic prospects.

A new working paper by the National Bureau of Economic Research (NBER) at the University of California, San Diego says that encouraging risk is the key to successful R&D programs. Credit: Whyframestudio

While the impending recession caused by the spread of COVID-19 is worrying, politicians and business leaders have adopted radical strategies, such as lower interest rates, to revive the weakened US economy. Research and development (R&D) has long been key to the country's economic prospects, and according to new research from the University of California, San Diego, a country's ability to maintain its competitive advantage in this area depends largely on how managers in R&D less risk averse. ,

R&D is important for the success of companies and is necessary to accelerate economic growth; however, as a rule, this is an expensive and complicated undertaking. For example, the decline in new drugs and breakthrough therapeutic agents, despite the increase in R&D costs, is partly due to the lack of risk from pharmaceutical and biotech companies. This causes concern among research and investor communities, which indicate a slowdown in paradigm shifts over the past quarter century.

According to the authors National Bureau of Economic Research (NBER) Working Paperencouraging risky decision making is key to successful R&D programs. Nevertheless, their studies show that the necessary tolerance for failures in the pursuit of remuneration is not the attitude that is equally distributed among R&D leaders, which creates problems for the development of science.

Co-author Joshua Graff Zhivin, professor of economics at the University of California, San Diego’s School of Global Policy and Strategy, cites an example of how risky research on unproven scientific paths has led to the discovery of the currently recognized role of immunotherapy cancer treatment,

“When the immunologist James Ellison developed an antibody that he thought was ready for pharmaceutical development, biotechnology companies repeatedly rejected it, rejecting his ideas as too far-fetched,” said Graff Zivin. “However, he survived, and today, drugs based on his initial ideas are now ready to become one of the most clinically and commercially successful anti-cancer drugs on the market.”

He added that making custom decisions can help the race develop a vaccine to stop the spread of COVID-19.

Why firms should hire R&D managers who have a “risk appetite”

To understand how managers respond to risk when making R&D decisions, the researchers conducted a series of experiments with graduate students as part of a program that focused on the intersection of business and technology. Many of these students continue to work in investment firms or act as R&D managers in healthcare and technology companies.

Nearly 200 MBAs and Masters of Finance from the Rady School of Management at the University of California, San Diego were asked to take on the role of director of research and development in a private company. In the structure of the tournament type, students had to “bet” on their preferred research projects from a series of hypothetical proposals that were evaluated and evaluated by an objective, external scientific advisory group. Proposals were evaluated on a scale of projects with high dispersion (i.e., with more risky results) and projects with low dispersion (i.e., with more predictable results).

The experiments provided financial rewards, which disproportionately contributed to the selection of more risky projects. Despite this, participants usually chose low dispersion investments, consistently demonstrating aversion to projects that had great uncertainty.

In another experiment with the same group, students were randomly allocated by budget, and they were asked to invest in a simulated portfolio, in which they again had to choose between risky and non-risky projects for investment. To the great surprise of the researchers, the participants again consistently decided to invest in projects with the safest results, especially among those with lower budgets.

“Although our members are trained and motivated to take greater risks in exchange for more rewards, they did not behave that way,” said Graff Zivin. “Our study indicates the potential inefficiency of the investment research process, and the results can help explain the low rate of breakthrough innovation.”

Who in the group liked risky businesses the most? Of the items, 52 percent were classified as risk-averse, 36 percent were risk-neutral, and 12 percent were risk-averse. They found that risk-taker decision makers often funded breakthrough projects.

The authors concluded: “Our results, which show that risk-tied participants made better investment decisions, indicate that firms seeking to encourage more innovation may want to include risk preferences for those workers who respond for research and development, as a factor in their hiring and promotion decisions. "

What is the best way to stimulate innovation? Competitive payment may be the answer.

Additional Information:
National Bureau of Economic Research, DOI: 10.3386 / w26847

Risk aversion on the part of R&D managers could hurt US economic prospects (2020, March 16)
restored March 16, 2020
from https://phys.org/news/2020-03-aversion-economic-prospects.html

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