Wednesday, December 30, 2015

Rewarding innovation: process vs outcome

Tata Nano is one of the several stories that figure in our book “8 steps to innovation”. Nano received various innovation awards including the prestigious Edison award in 2010. Unfortunately, it hasn’t seen the market success yet. Does it mean that the decision to give innovation awards to Nano was poor or incorrect? Let’s explore this question in this article using Daniel Kahneman's lecture titled "The science of decision" delivered to the Pentagon (see the video above). 

Let’s begin with what Kahneman calls the key feature of decision making under uncertainty. “The key feature”, Kahneman says, “is that there is no perfect correlation between the quality of decisions and quality of outcomes. You could make a good decision and fail and you could make a bad decision and succeed.” (12:18) But then why are we so outcome obsessed?

Well, because we can’t help seeing it that way (15:15). We intuitively feel that if something ended well, it was done well. And if something ended badly, somebody must have goofed. The fundamental bias in operation here is called “hindsight bias”. Once the outcome appears e.g. that Tata Nano hasn’t had a success in the market, our model of the world changes. It starts looking obvious that the “cheap car” publicity was doomed to fail. We tend to evaluate the decision such as the Tata Motors’ decision to invest in Nano based on our current model of the world. And we find it extremely hard to evaluate the decision with the model of the world that existed before the decision.

Hindsight bias leads to another bias called “outcome bias” (19:30). This means we judge a decision on whether the outcome was a success or failure. This has significant implications. When we give innovation awards, we may be promoting daredevil gamblers rather than smart decision makers. More importantly, we may be losing good people because we may be punishing them for the failed outcomes in spite of their good decisions. So what should we do?

Kahneman suggests that we should focus on the process and not on the outcome when we judge a decision (13:28). Was the right process followed at the time of the decision? For example, was the investment decision based on a robust set of questions like Real-Win-Worth-it. An idea which comes out as the most promising idea through the scrutiny of such a process may eventually fail for factors not known at the time of the decision. That shouldn’t change the quality of the decision.

Kahneman also suggests that a good process of making decisions should ideally involve de-biasing steps, sort of corrective steps. For example, we can look at cost or time overruns for a similar project in estimating cost or duration (30:20). Or we could perform a project pre-mortem and bring out various reasons why this idea may not work etc (31:45).

Some companies recognize this and give rewards for smart failures. For example, P&G has in the past given “President’s fail-forward award” and Tata Group gives “Dare to try” award for smart failures from which significant learning has come out.

So, was the decision to award Tata Nano poor? Not necessarily. It depends whether the award was given after evaluating the process of making key decisions in developing Tata Nano. Not on whether Tata Nano succeeds in the market or not.