Patently Risky : Framing, Innovation and Entrepreneurial Preference

It is well known that innovation law and policy must strike a balance between incentivizing inventions on the one hand, and granting monopolies to successful innovators on the other. In achieving this balance, it is commonly presumed that actors in innovation markets respond to their economic environments just like anyone else (at least on a first approximation). This paper presents evidence to the contrary, using a series of controlled experiments. In our experiments, subjects were offered a choice between (a) a monetary payoff with certainty; and (b) a riskier (but potentially more lucrative) option. Our principal manipulation was to alter how the latter option was framed: subjects in the control group were presented with an unadorned choice between safe and risky options, while subjects in the treatment group were confronted with the identical economic choice, but with the risky option framed as an investment in an “innovation-related” project. We find strong evidence that when the risky choice was framed in this way, subjects exhibited significantly less risk aversion, and that they did so across many variations on the experimental setting. We calibrate our results to an equivalent downward “shock” that the innovation-related frame introduces to subjects' manifest risk preferences. Our findings have implications for legal design questions, not only within intellectual property but also in other legal settings (such as venture capital) where the need to account for people's risk tolerance plays an important role