Abstract

Leaping Forward and Bridging Back: Understanding Cognitively Distant Opportunities

History of innovation is replete with firms failing to appreciate the potential of breakthrough innovations. In 1876, the Western Union, a company that held a monopoly on long-distance communication via telegraph, refused to invest $100,000 in Alexander Graham Bell’s telephone patents, dismissing the invention as an “electrical toy.” (Aronson, 1977, p. 16). In the 1940s, IBM turned down the opportunity to invest $10,000 in an exclusive license to develop xerography—a technology that enabled automated copying on plain paper (Dessauer, 1971). More recently, the CEO of Microsoft could not see how the iPhone could possibly develop a commanding market share (Lieberman, 2007). One way of conceptualizing the difficulties individuals have in understanding breakthrough ideas is to think of such ideas as being cognitively distant from existing products. The eventual success of innovations described above suggests that understanding the process by which the proponents of cognitively distant ideas can facilitate their ideas’ acceptance is critical to a fuller understanding of the process of idea diffusion. To explore this process, I draw on an historical case study of bond investors’ acceptance of mortgage-backed securities (MBS) in the U.S. over the period from 1970 and 1987. At the outset, bond investors reacted to the differences between MBS and bonds by refusing to invest in the new securities, i.e., rejecting the innovation. This rejection was due in important part to MBS carrying prepayment risk—a risk that was not present in bonds. MBS issuers’ eventual success in securing the acceptance of their innovation came from their efforts to reduce the cognitive distance between MBS and bonds by turning prepayment risk into a dimension that was shared between the two domains. The introduction of this new dimension allowed the measurement and manipulation of distance between the domains of MBS and bonds.