Critique report for: Innovation risk how to make smarter decisions by Robert C.

Merton
Article link: http://hbr.org/2013/04/innovation-risk-how-to-make-smarter-decisions/ar/1 Summary:
New products and services are created to enable people to do task better than they previously could or do things they couldnt before. But innovations also carry risks. Just how risky an innovation turns out to be depends in great measure on the choices people make in using it. Attempts to gauge the riskiness of an innovation must take into account the limitations of the models on which people base their decisions about how to use the innovation, warns Robert C. Merton, MIT professor and Nobel laureate in economics. Some models turn out to be fundamentally flawed and should be jettisoned, he argues, while others are merely incomplete and can be improved upon. Some models require sophisticated users to produce good results; others are suitable only to certain applications. And even when people employ appropriate models to make choices about how to use an innovation, striking the right balance between risk and performance experience shows that it is almost impossible to predict how their changed behavior will influence the riskiness of other choices and behaviors they make, often in apparently unrelated domains. Its the old story of unintended consequences. The more complex the system an innovation enters the more likely and severe its unintended consequences will be. Indeed, many of the risks associated with an innovation stem not from the innovation itself but from the infrastructure into which it is introduced. In the end, any innovation involves a leap into the unknowable. If we are to make progress, however, thats a fact we need to accept and to manage.

Characteristics of a good research Clearly defined purpose

Research process detailed

Research design thoroughly planned High ethical standards applied Limitations frankly revealed

Adequate analysis for decision makers needs Findings presented unambiguously Conclusions justified

Researchers experience reflected

How the study followed or failed to follow the criteria The study clearly shows that how risk and return can be traded off to arrive at smarter decisions which are less error prone in nature and also that any innovation involves a leap into the unknowable. If we are to make progress, however, there are some facts we need to accept and to manage, and those facts are stated through examples in the research article by the author. The research article is fairly detailed with the propositions clearly stated; however usage of numerical data, info graphics, pictures and experiments on some sample and a well stated solution could have augmented the research objectives and made the research more sound, but maybe its beyond the scope of the target journal, so the researcher has to shy away from those. The article is thoroughly planned with the basic premise stated at the beginning and then it is carried forward with subheadings such as Recognize That You Need a Model, Models Limitations, Expect the Unexpected, Check the Infrastructure and Systematic Risk etc. Safeguards the interests of stakeholders, participants, clients and the examples mentioned with no visible threats to the any of the entities mentioned as examples in the article. The researcher clearly states the limitation of the modeling explicitly stating the importance of understanding the difference between incompleteness and incorrectness. The researcher also focuses on the need to expect the Expect the Unexpected. The researcher has sufficiently detailed findings which are tied to collection instruments; there is a usage of several different situations and real life examples which gives required weight to the research. Most of the evidences stated in the article, are unambiguous but some example like 20072009 financial crisis are hazy with incomplete direction given to the basic motive of the article which was to state that innovation risk needs to be managed to make smarter decision. The researcher with his varied experience and examples like Black-Scholes, Ferrari, travelling, aircraft and other examples is clearly able to justify that an adequate assessment of the risks involved with an innovation requires a careful modeling of consequences. The researcher uses the example of Black-Scholes model for financial modeling and says that he himself was involved in developing this model in the 1970; it clearly shows that researchers experience is well reflected in the article. Robert C. Merton being a noble laureate in economics in well reflected by his usage of economic analysis to explain the concepts of risk and returns.

Key learning from the article:

Need for model with all possible factors impacting: We should know the various factors influencing the result and the complex correlation between them. As any factor cant influence the result single handed. More the factors your model incorporates, the better your assessment will be of the risks you incur in deciding whether and how to adopt a particular innovation. And to know these factors we should know that we need a model. Acknowledging models limitations: There can be two problems with the model incorrect model and an incomplete model. An incorrect model is one whose internal logic or underlying assumptions are themselves manifestly wrong. Once a model is found to be based on a fundamentally wrong assumption, the only proper thing to do is to stop using it. Whereas no model can take into consideration all the factors affecting a research so almost all the model suffer with this problem. But we should Note that the lessincomplete model improves upon the base version rather than replacing it altogether. The basic model does not need to be unlearned but instead added to. Taking care of business uncertainties: Even with the best effort and ingenuity, some factors that could go into a model will be overlooked. No human being can possibly foresee all the consequences of an innovation, no matter how obvious they may seem in hindsight. This is particularly the case when an innovation interacts with other changes in the environment that in and of themselves are unrelated and thus not recognized as risk factors. Understand the Use and the User: Even if we have built a model that is fundamentally correct: that is, it does not defy the laws of nature or no-arbitrage, nor does it contain manifestly flawed assumptions. Lets also assume that it is more complete than other existing models. There is sti ll no guarantee that it will work well for you. A models utility depends not just on the model itself but on who is using it and what they are using it for. Dependence on Infrastructure: Our preconceptions about the operating environment can change some time so we should make the model in such a way that it will not deviate too much in terms of efficiency and result.

Limitations of the article

Dont give the criterias for evaluating the model: Our ability to create models rich enough to capture all dimensions of risks is limited so which model to be used is not mentioned. More than one model can be present: When more than one model are possible which parameters should be given more weightage is not discussed. Using the existing models: Time proven research models like Porters 5 force and BCG is not focussed in article.