Large organizations are structurally wired to kill innovation because accountability pushes risk-aversion downward: managers reject favorable probabilistic bets because the 20% chance of failure costs them their job, while the CEO sees the aggregate upside — resulting in a culture that optimizes for downside avoidance and eliminates the discovery layer.

Rory recounts Richard Thaler asking eight division heads if they would take a bet with highly favorable odds; six said no because a 20% failure rate would lose them their jobs, while the CEO wanted all of them to take it for aggregate gain. The result is that marketing and innovation — fat-tailed activities — get destroyed by the pursuit of efficiency. ✦ AI generated

Rory Sutherland · My First Million · 2026-07-27 · original ↗

There's a wonderful story I always tell which is Richard Thaylor the Nobel prizewinning economist and behavioral economist the author of Nudge. He once spoke to a board of about 10 people very large company. And he goes to the eight heads of the largest divisions of this company and he asks them all simultaneously a question. Would you take a decision if it had a 50% chance of increasing your profits next year by 50% and a 20% chance of reducing your profits by 30%. And six out of the eight of them said no. And Thaylor goes back and says well you know you're all good enough mathematicians I assume to realize these are highly favorable odds. to a gambling man, you know, this is a very very good bet and yet you declined to take part. Why is that? And they reply six out of the eight of them uh because uh 20% of the time or 30% of time I'd lose my job. And then the interesting thing happens which is the chief executive is sitting at the end of the table and looks a gasast at the eight people and goes but I want all of you to take those odds because net net in aggregate we'd almost certainly end up massively better off. Yes, two divisions, one division might have a slightly disappointing year but four of them would perform spectacularly. And you realize that the way that businesses are structured, as you push responsibility and accountability further and further down the organization, they become more and more risk averse and they become more and more uncertainty adverse. So they would prefer a definite 5 to 10% to a probabilistic a 50% chance of 50%. And what happens then is that you fundamentally you become highly conservative. You're more worried about downside avoidance than you are upside opportunity. And as a result, obviously both innovation and marketing, I would argue, are fat tailed activities where 10% of what you do is probably more valuable than everything else. You know, you can't tell in advance which 10% it's going to be. They are processes of exploration and discovery. And what you do is you get rid of the discovery layer in the pursuit of efficiency. And in the short term it looks like a great idea but in the longer term it's it it proves fatal I think because you've lost the capacity to adapt to reinvent to reposition in pursuit of the occasional um the occasional breakthrough.

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