Behavioural Economics and Innovation
I was very interested by a recent blog by David Bamford on the subject of behavioural economics. The bottom line is that buyers of technology are fickle and not altogether objective when it comes to buying new technology, for a variety of very human reasons:
- Benefits are only realised sometime in the future
- Benefits are uncertain: the product might not work as expected
- Benefits are usually qualitative: it’s difficult to enumerate the value and make absolute comparisons between different options
- Buyers (over)value the items in their possession more than prospective items
- Buyers are loss-averse.
And likewise for the purveyors of technology: their view of the value of their offerings is often very different to their prospective buyers.
As the owner of a small company that develops technology, this all certainly rings true! The initial development to early market acceptance/pay-back phase for new technology can take several years. That's a big investment in time and capital for a small company.
I've also definitely noticed a reduction in 'IT' projects risk tolerance in our clients over the past 5-10 years. It seems to me that many E&P companies are trying to squeeze all the risk out of IT spend decisions and projects. If only they were all as diligent at reducing Exploration risk where the real money is spent, but that's another discussion!
I agree that technology selection and implementation needs to be handled with due diligence and managed properly. But are companies 'throwing the baby out with the bath water' and forgetting how to experiment and innovate?
Some of our best products have come from working closely with clients that are prepared to take a risk on new technology or different approaches. Not everything works, but when it does, the value often far outweighs the downside from the other less successful experiments. These clients are increasingly rare. Most now look for tried & tested solutions, expecting others to have taken the risk out of the decision for them.
In the long run, I feel there's a real danger that the smaller innovators will cease to feed through next generation technologies and ideas, because of this 'perfect storm' of behavioural economics and IT risk aversion in the petroleum sector. There is of course a flipside: The technology business also needs to take a more realistic view of the value of the products they develop, regulate their marketing hyperbole and build confidence in the buyer community.
Posted by Gareth Smith, Managing Director, Exprodat.