Ditching Loss Aversion: How to Break Free from Incrementalism and Pursue Transformative Ideas

The theory of loss aversion holds that humans are averse to losses, often to the point of irrational behavior. Coined by psychologists Amos Tversky and Daniel Kahneman in the late 1970s, loss aversion suggests people will go out of their way to avoid a loss, even if it means missing out on potential gains. When translated to the business world, this leads to product leaders who push for incremental innovations over bigger, bolder bets. This is often seen in management hierarchies that are focused on avoiding setbacks, rather than pursuing breakthroughs and moonshots.

Why do so many companies and product leaders focus on incremental improvements? Because it feels safer to tweak a tried-and-tested product or service in order to eke out those extra few percentage points that might make it marginally better. Its almost guaranteed to show some incremental growth and short term returns. Whereas the bigger bets may very well deliver nothing, especially in the short term.

But there is a paradox here: it is often the transformational, moonshot innovations that lead to truly transformative success. As Tom Brown, CEO of IDEO, puts it in his book Change by Design: "The innovations that will have the most impact are those that aim for the stars."

Moonshot thinking allows for a unique perspective on innovation. It requires us to blast through conventional constraints and assumptions. To achieve this, product leaders need to foster an environment where people feel free to take risks, without fear of penalization. This culture of psychological safety is crucial for transformative innovation.

The Innovator's Dilemma demonstrates that not all organizations are inherently suited to radical innovation. It can be difficult for companies to abandon tried-and-true approaches even when a new technology threatens to disrupt their industry. Christensen argues that to avoid being disrupted by new technology, companies need to foster a moonshot mindset internally. But product teams, who are motivated to show growth in their existing product lines, rarely spend time finding ways to disrupt themselves.

Some companies stand out for their moonshot thinking. For example, Netflix literally transformed the way we consume media by developing a streaming platform that replaced movie rental stores. They did it by embracing risk and taking big leaps. Similarly, the Wright brothers revolutionized the way we travel by inventing the first successful airplane. They pushed through countless setbacks by persevering in their moonshot vision.

In the book Yes to the Mess, Frank J. Barrett argues that a culture of experimentation is key to moonshot thinking. He uses the example of jazz musicians, who are skilled at improvising and collaborating in a way that can lead to beautiful, unexpected music. "The best jazz players know that messiness and disruption can actually create the space for innovation and growth," he writes.  He calls on readers to embrace the "messiness" and disruption that can lead to transformative breakthroughs. The key is to try new things, collaborate, and learn from mistakes.

Marty Cagan, author of Inspired, advocates for a user-centric approach to innovation. "Moonshot thinking means focusing on the user, relentlessly," he writes. "When an organization starts with the question, 'What will make the user's life ten times better?' it is much more likely to come up with game-changing ideas."

Ultimately, it is in embracing risk that transformative innovations are born. While incremental changes improve products and services in the short term, moonshot thinking has the ability to redefine entire industries.

To put these ideas into action, consider doing an audit of the projects you are currently working on. As a product or business leader, ask yourself: how many are focused on incremental improvements, and how many are taking a moonshot approach? To move towards more transformative innovation, challenge yourself to ask the right questions:

• Are you focused on the user, and thinking about ways to make their life ten times better, rather than just a little bit easier?
• Are you fostering a culture of experimentation, where unexpected ideas and collaborations are encouraged?
• If it was absolutely necessary to pivot your product today, what would you do?

By reflecting on these questions, you can start to embrace the mindset needed for transformative innovation.