Organizations often face the strategic dilemma of choosing between exploration—such as diversifying into new products or markets—and exploiting their existing opportunities. Our research suggests that the subjective experience of losses can influence the willingness to explore. Participants in our experiments chose from options that yielded different payoffs. While some participants could only experience gains, others faced the same options with a downward shift in payoffs, resulting in occasional losses. Those experiencing losses received an additional payment at the outset to ensure equal economic incentives.

Our findings support the adage, "necessity is the mother of invention." Participants who experienced losses during a task round were more likely to seek alternative options to prevent further losses. However, upon reaching a break-even outcome, they became significantly less likely to explore than their counterparts who could only experience gains. We conclude that exploration is driven by the desire to avoid experienced losses but is curtailed by the fear of potential losses.

Organizations can tactically create subjective experiences of losses, even in profitable situations. For example, setting aspirational sales targets that teams struggle to achieve may inspire them to devise innovative strategies and explore untapped market opportunities