The Knockoff Economy

How imitation sparks innovation

The (Over-)Optimism of Creators

Experiments show creators overestimate the value of their work. Is that bad?

Conventional thinking about innovation and creativity relies on the concept of a rational innovator. Indeed, an ideal version of the rational innovator is the basis for our patent and copyright laws, which are meant to spur creative effort and bring us more great new inventions and artistic works. Patent and copyright work by giving property rights to creators. But property rights are not valuable in the abstract.  They are useful only if the underlying creative work—the novel, the film, the computer software, the new drug—are valuable. If a creator's work is worth money, then having the exclusive right to offer it for sale or license—which is what copyright and patent give to authors and inventors—is a very nice thing indeed.

Whether this system makes sense depends on the validity of the assumption of one crucial underlying assumption. Do creators act rationally? Our law assumes that innovators calculate, either explicitly or implicitly, the cost of creation versus the size of the return they will likely enjoy. A writer might anticipate a certain advance from her publisher; a musician might estimate the sales of a new song. This expected return shapes how much effort they pour into creation and what kinds of creation they pursue. Abundant research in economics and psychology, however, suggest that their judgments are often likely to be wrong—and systematically so.

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As many studies have found, individuals are very bad at assessing their own future prospects. They have a pronounced optimism bias. They think they will succeed where others have not, and they heavily discount the prospect of failure. Nearly all newlyweds, for example, believe they will not get divorced, when in fact a large minority will—and often within a few years. Likewise, students wildly overestimate their likely grades, even in the face of stiff competition. Like the residents of Lake Wobegon, we all want to believe we are above average.

Optimism bias has been shown to apply broadly to life events, and there is no reason to think it does not also apply to innovation. Indeed, two laboratory studies conducted by one of us (Sprigman) and Christopher Buccafusco of the Chicago-Kent College of Law showed that creative artists believe their work is far more valuable than  do potential buyers.

In the first study (free download available by clicking this link), several hundred subjects were given the opportunity to buy and sell chances to win a haiku contest. The subjects were randomly assigned to be Authors or Bidders. Authors were told that they would be competing in a contest with nine other writers. A poetry expert would select the winner, who would receive a $50 prize. Each bidder wrote down the amount he would be willing to pay to purchase a specific Author’s chance to win. Similarly, each Author wrote down the amount she would be willing to accept. On average, Authors were willing to sell their chance of winning the haiku contest for $22.90. But Bidders’ average willingness to pay was less than half: only $10.38.

These results are consistent with the hundreds of other studies that have confirmed optimism bias in a wide variety of settings. Authors believed that they were roughly 30 percent likely to win a contest where in reality they had, on average, a 10 percent chance. They were irrationally optimistic about the reward they expected.

These results were replicated with would-be professional artists—painting students from the School of the Art Institute in Chicago (free download available by clicking this link). The students were invited to enter a medium-sized painting into a contest. The Painters were told that they would be competing with nine other entrants for a $100 prize judged by an expert. Each Painter was matched with one of 10 additional subjects acting as Bidders.

Here too there was a huge gap between bidders and creators—in fact, the gap was quite a bit larger, which suggests that would-be professional creators tend to over-value their work even more than do ordinary people. The Painters demanded on average nearly $75, while the Bidders were willing to pay less than $18. And again, the biggest cause of the widely diverging variations was over-optimism. Painters believed that they had more than a 50 percent chance of winning the contest. The real number, since there were 10 of them, was (on average) 10 percent.

We see behavior like this all the time. Most people think they’re a better-than-average driver, not to mention smarter than average. And the haiku and painting experiments suggest that creators may be even more prone to this sort of optimism bias. Optimism bias, in short, leads many innovators to think they will gain a greater return from their intellectual creations than they actually do.

Why is this important to understanding creativity? Because optimism bias likely acts as a subsidy for innovation. Creators who have an unduly strong belief in their ultimate prospects for success should be willing to invest more in their creativity. This increased willingness to invest is likely, in turn, to lead to increased creative output as compared with a world in which creators rationally calculated the odds. And this may be true even in our current situation where an awful lot of people take creative works for free — that is, pirate them. Creators' irrational optimism may lead them to create even in the face of expected losses from piracy.

Of course, many artists and inventors toil because they are driven to, not because they expect riches. But many do expect — or hope — for some tangible reward. For these people the widely noted phenomenon of optimism bias is as likely to work its magic as effectively in the creative world as it does in assessments of marriage or job prospects. They expect more, and so they work to create more.

Christopher Sprigman, J.D., is the Class of 1963 Research Professor at the University of Virginia School of Law. He is the co-author of The Knockoff Economy.

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