Rationalizing risk aversion in science

TL;DR

This paper uses an economic model to explain why scientific research tends to be risk-averse, highlighting how incentive structures discourage high-risk, high-reward projects and proposing that self-governing reward systems are insufficient to promote risky research.

Contribution

It adapts a hidden-action economic model to analyze how unobservable effort and risk in science lead to risk-averse behavior and suggests that current incentive structures are inadequate for promoting high-risk research.

Findings

Risk aversion in science arises from incentive misalignments.

Rewarding major discoveries could incentivize high-risk research.

Self-governing reward systems are insufficient to motivate risky scientific endeavors.

Abstract

Scientific research requires taking risks, as the most cautious approaches are unlikely to lead to the most rapid progress. Yet much funded scientific research plays it safe and funding agencies bemoan the difficulty of attracting high-risk, high-return research projects. Why don't the incentives for scientific discovery adequately impel researchers toward such projects? Here we adapt an economic contracting model to explore how the unobservability of risk and effort discourages risky research. The model considers a hidden-action problem, in which the scientific community must reward discoveries in a way that encourages effort and risk-taking while simultaneously protecting researchers' livelihoods against the vicissitudes of scientific chance. Its challenge when doing so is that incentives to motivate effort clash with incentives to motivate risk-taking, because a failed project may be evidence of a risky undertaking but could also be the result of simple sloth. As a result, the incentives needed to encourage effort actively discourage risk-taking. Scientists respond by working on safe projects that generate evidence of effort but that don't move science forward as rapidly as riskier projects would. A social planner who prizes scientific productivity above researchers' well-being could remedy the problem by rewarding major discoveries richly enough to induce high-risk research, but scientists would be worse off for it. Because the scientific community is approximately self-governing and constructs its own reward schedule, the incentives that researchers are willing to impose on themselves are inadequate to motivate the scientific risks that would best expedite scientific progress.