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A closer look at how bias affects dealmaking

June 08, 2022

Colin Wittmer
Deals Leader, PwC US
John Potter
Deals Sector Leader, PwC US

A closer look at how bias affects dealmaking

There’s a saying in poker that goes something like this: You don’t play the hand, you play the players.

In dealmaking, you often have imperfect information. Due diligence informs the situation but, when it comes time to negotiate the finer points, do you know what aspects are most valued and what concessions they’re willing to make? Or what concessions they seek from you? How much value do you place on the deal? Where is the win-win territory?

Understanding the biases of those at the table can be a powerful element in a negotiation. But dealmakers — like many humans – use a shortcut: making assumptions based on their perceptions instead of seeking to understand them.

We saw an example of this play out during a session at PwC’s 2022 Deals Exchange.

Free money and optical illusions

Behavior economics researcher and author Zoe Chance held up a $100 bill and threw out a tantalizing challenge to the room full of dealmakers: Convince me to give it to you. One attendee made a plea built on assumptions as to what Chance would value. It worked, and Chance turned over the $100. But the point was clear: discovering what the counterparty values, and being intentional as to where you see value, can help overcome shortcuts that our biases present — and reveal hidden value that can cost you nothing but generate better returns.

Understanding the meaning behind what a counterparty wants — instead of just making assumptions — is crucial to striking win-win deals that help create value. But another Exchange speaker, neuroscientist and author Beau Lotto, explained that understanding isn’t just predicated on gathering more information. It’s also about how you perceive and process that information. Lotto used several audio and visual examples to show attendees how their perceptions could be altered by context, causing them to see the same color differently or to believe they heard messages that weren’t actually present in an audio recording.

Impact on deals

It’s not hard to see how biases (based on assumptions, which in turn are based on perceptions) influence deal negotiations, a point Lotto made in his presentation. PwC research identified three overlooked elements of value creation: culture, purpose and digital acumen. Unrealistic optimism bias can often oversimplify the effort to integrate a new acquisition, even though the two company cultures can be at odds with each other. Self-serving bias might lead to actions that are counter to one company’s sense of purpose, leading to the loss of key talent. Status quo bias might suppress the importance of digital transformation, causing the negotiators to often miss the modernization steps needed to position the company for a value-creating merger.

The word bias has a negative connotation that can conjure up feelings of moral failure. This isn’t failure. It’s human reality. These heuristics allow us to survive, and they can govern the vast majority of our daily (unconscious) decisions. Everyone has biases, and they aren’t inherently good or bad. The important point is that biases play a key role in motivating behavior.

Understanding them can give you a roadmap through complex negotiations, making it important to watch for information that gives you a sense of what biases, and preferences, influence your counterparty. And influence you.

The more you’re aware of your own biases, the more intentionally you can drive decisions. Have you considered how your biases play into your deals? Our dealmaking identity quiz is another simple tool to open your awareness, of both yourself and others.

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How do you navigate your own biases? Cass Sunstein, an acclaimed author and expert in behavioral economics who spoke at the Exchange, recommends the use of several safeguards to help you make better decisions. 

  1. Cost-benefit analysis.
  2. A/B testing, such as testing two different positions with a small group before positioning on a deal.
  3. Educational nudges, real-time reminders about the consequences of certain actions (a retail example: a sign reminding customers that if they buy two tacos they’ll get a third taco free).
  4. Architectural nudges, or designing systems that help encourage certain behaviors such as shifting post-deal actions from an opt-in to an opt-out model.

Of course, biases aren’t the only nonfinancial factors that can impact dealmaking. Speakers at the Exchange discussed a range of factors, including noise, influence, perception and dealmaker personas. The Exchange was a good time for dealmakers to consider those psychological drivers because they’re likely to be busy in 2022. And those three overlooked elements of value creation we mentioned above… those led to a robust discussion of how deals can be a key element of driving transformation.

Last year was a record-setting year for deals. While the first quarter of 2022 lagged, volume was still historically high compared to all the years before 2021, and there’s good reason to believe that the deals market can stay hot.

As we shared with attendees at the Exchange, discussions with our clients reveal that they remain optimistic despite inflation and rising interest rates. First, there’s a ton of cash in the system that needs to find a home. S&P 500 companies held $3.7 trillion of cash & equivalents as of the end of 2021, according to S&P Capital IQ.

Second, we’re not over-leveraged. If you look at just leveraged buyouts, which often attract the most leverage, we were still just a bit under six times leverage coming out of 2021. So we’re not looking at an over leveraged market at the end of the beginning of this cycle. Finally, banks appear to be healthy and we remain optimistic about the likelihood that this will not become the global financial crisis that we saw back in the aughts.

Another reason for optimism is the increasing need for speed in business transformation. Whether that’s changing your supply chain, changing the way you go to market or adding capabilities, the market is impatient and the fastest way to help transform your business is through M&A.

So get ready for a busy year — and make sure you’re watching for the psychological tells from the counterparties across the table.

Types of biases

Cass Sunstein, an acclaimed author and expert in behavioral economics, recently shared some of the common biases executives should be aware of during a session at PwC’s 2022 Deals Exchange

  • Availability bias
    Being overly concerned about new issues and growing complacent about long standing items on the table, even though the older ones might be more likely and consequential.
  • Unrealistic optimism bias
    Unrealistic optimism regarding any proposals an organization develops. Newspaper sports pages are often filled with examples of this type of bias around draft time as many teams boast that they’ve all landed the next hall of fame player.
  • Present bias
    Focusing primarily on short-term results instead of thinking about what will happen on a longer time horizon. A classic example of this would be many of the public company executives making decisions that can boost quarterly earnings at the expense of funding R&D or building much-needed new manufacturing capabilities that would have eventually generated more revenue over the next decade.
  • Status quo bias
    Being afraid to make any changes, resulting in an organization getting stuck in patterns it should change. This one is better known as inertia.
  • Self-serving bias
    Making assessments based on what is good for a person individually, regardless of the problems it might create for the larger organization. A CEO engineering a company’s sale to obtain a bonus even though the acquirer is not a good long-term fit would be an example of self-serving bias.