Motivating Innovation: The Effect of Loss Aversion on the Willingness to Persist

We investigate the willingness of individuals to persist at exploration in the face of failure. Prior research suggests that the organization's \tolerance for failure" may motivate greater exploration by the individual. Little is known, however, about how individuals persist at exploration in an uncertain environment when confronted by prolonged periods of negative feedback. To examine this question, we design a two-dimensional maze game and run a series of randomized experiments with human subjects in the game. We develop predictions for the game using computational models of reinforcement learning. Our methods extend beyond two-period models of decision-making under uncertainty to account for repeated behavior in longer-running, dynamic contexts. Our results suggest that individuals explore more when they are reminded of the incremental cost of their actions, a result that extends prior research on loss aversion and prospect theory to environments characterized by model uncertainty. We discuss implications for future research and for managers.