The Bazerman Auction And Innovation

Published On January 11, 2010 | By mbalogh | Blog

At Harvard Business School Max Bazerman is a professor of negotiation.  He starts each semester off the same way  — by auctioning off a $20 bill.  There are two rules to the Bazerman auction. First, bids go in $1 increments and, second, both the first and second place bidders must pay at the end of the auction.  Max’s record winning bid is $204.

The Bazerman Auction is not an example of how to win; it’s an exercise in how not to lose more then you have to.  It’s called loss aversion.  As Kenny Rogers puts it, it’s about knowing when to hold ’em, and knowing when to fold ’em, and it goes like this:  As the bidding progresses the bidder’s mentality becomes about getting something, anything, for the investment.  They should stop bidding at $19 for a $20 bill they don’t because, remember rule #2, the second place bidder also pays.  So they bid $20 to try and break even.  They’ve come this far.  It’s only $1 more.  If they could just win that $20 the investment will pay off.  $204 later, the winner nets $184 loss, the loser spends $203, and Max donates $387 to charity.

This is the loss aversion trap and it’s akin to how innovation is run in many organizations.  The end result, the thing to look out for, is when it comes to loss aversion even the winner loses.  Innovation can be the same way.

Rita McGrath is a professor at Columbia Business School.  In this youtube interview, titled Use Failure to Grow Your Business , she talks about discovery driven growth where there is no platform of experience to base future plans on — innovation.  It’s minimizing risk and loss while maximizing education.  As McGrath puts it, we should “plan to learn, not to plan to be be right.”  Here she defines “intelligent failures” as the opposite of Bazerman’s loss aversion.  Intelligent failures are, “carefully planned, contain the downside, and learn a lot from the expenditures … manage the cost of failure, not the rate of failure.”

In his Havard Business Publishing interview on youtube, titled Innovating on a Shoestring , Scott Anthony, president of Innosight, gives some suggestions on how to innovate inexpensively.  Among them are concentrate, manage, and collaborate. Concentrate on high-potential innovations and drop the low-potential efforts from your innovation portfolio.  Manage time and innovation smartly, as you would the rest of your organization.  Collaborate with customers, channels, and partners — spreading the work load also spreads the risk.

Innovation in marketing is no longer a luxury, it’s a necessity, and social media is at the forefront.  eMarketer estimates a 35% growth,$1 billion in 2010, on social media spending not counting paid advertisements which is expected to jump 7.1% or $1.3 billion on it’s own.  This is real money, not experimental budgets.

Back in October of 2009 I published a post on risk and innovation titled Failing To Succeed .  This post takes failure and innovation theory a step further.

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