The secret for you to avoid the “Winner’s Curse” in innovation

The SECRET is to know the probability of various paybacks. Imagine you’re at an auction and you’re bidding on an old record collection, because you think you can sell it later. The bid goes up up up, and at the end, the auctioneer yells, “Sold, to the woman in yellow for $100.” And that’s you! Congratulations! You’ve won! Or did you? What if instead you simply overpaid for the record collection? That’s what we know as “the winner’s curse”. It’s the same thing that can happen if you bet on innovation.

The winner’s curse can result from any of several cognitive biases.  The anchoring bias is the tendency to rely too heavily on the first piece of information you receive when making a decision. Maybe you heard from someone in the hallway how valuable the record collection would be. The overconfidence bias is the tendency to overestimate your own abilities and knowledge. Perhaps you’ve had success buying then selling at a profit later. And the sunk cost fallacy is the tendency to continue investing in something that is not working, simply because you have already invested a lot of time, money, or effort into it. You’ve come all this way to the auction, spending several hours -- you don’t want to throw that away now.

With all these biases working against you, how can you avoid the winner’s curse? The SECRET is to estimate the probability of selling the collection at several given price points, before you attend the auction. If you haven’t done this before the auction, you’ll be stuck with making your own single estimate, which increases risk. And then apply the Kelly Criterion to find how much you should pay. The Kelly Criterion helps you avoid bad bets. And that’s not only true of record collections, but also of innovation project collections! What criteria are YOU using to guide your investments in your innovation portfolio? If you’re unsure, I’d love to talk with you. Just email me at dv@kpco.us with a subject line “Innovation Portfolio”, and we’ll talk soon.

RE: Are you paying too much for your innovation project portfolio?

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