November 24, 2020

The impact of unconscious bias in Financial Services M&A transactions

Royds Withy King, together with PCB Partners have teamed up with Professor Scott Moeller, Director of the M&A Research Centre at The Business School, to explore some of the biases which are most prevalent in M&A transactions and the impact that they can have. Particularly, Overconfidence, Confirmation Bias and the Illusion of Control. So what are these biases and how do they manifest themselves in financial services M&A transactions?


People make mistakes more frequently than they believe, invariably view themselves as better than average and overestimate how frequently they will experience favourable outcomes. Data shows that what people think will happen 98% of the time only actually happens 60% of the time. Overconfidence bias comes into play when decision makers feel that they know how to do a deal because they have what they consider to be excellent experience having done something similar previously. Along the way, they can ignore advice from experts. The data shows that half of all M&A deals do not deliver the projected results. Executives don’t get to the top of their organisations by failing and they believe that this success will extend into the M&A world. Examples can be seen where valuations are based on faulty assumptions about post-completion synergies and economies of scale leading to a buyer overpaying, or a belief that the personnel of the target will react positively to the transaction and so not enough consideration is given to the post-completion cultural integration process.

Confirmation Bias

It is common for people to seek information that agrees with their existing beliefs, giving more weight to information that confirms their preconceptions and dismissing information that is contrary to those existing beliefs. This is confirmation bias in practice. Good or confirming information is given too much importance whilst bad news is ignored. This can be particularly prevalent in the due diligence process, with decision makers getting emotionally attached to deals and influenced by the time investment made to get to the point that they are at. A mind-set of “it would be disappointing to walk away now” can take hold. This can be seen for example where data which shows that estimated synergies resulting from the transaction are not achievable but this is dismissed as inaccurate or not what will happen in practice.

Illusion of Control

People often overestimate the extent to which they can control events, believing that they can “beat the odds”. In an M&A context this is particularly prevalent in the downplaying of the influence or impact that external factors will have in determining the success or failure of the transaction. For example, in the context of a consolidator in the wealth management industry, the buyer believing that it can control the reaction of the target’s clients to the transaction, Whilst the buyer’s decision makers may believe that the buyer can provide a seamless advisory transition for clients, they will have no control over the emotional reaction of clients to the transaction and whether any of these clients will reassess whether to continue with the target as their engaged advisory firm. When these clients react in a manner other than that which was expected, it can undermine post-completion growth plans and lead to financial projections proving to be unrealistic.

What can Financial Services dealmakers do to tackle these biases?

The due diligence process is a crucial phase of a transaction process and should be the moment where assumptions are tested and unexpected issues identified. This process can however be seriously undermined by the unconscious biases outlined above, with issues being downplayed or worse, not identified at all. It is crucial that decision makers involved in transactions, and their advisory teams, are aware of unconscious biases and the role that they play and are proactive in challenging assumptions or emphasising risks that are being downplayed. An awareness and understanding of how mistakes can result from psychological factors will ultimate lead to better decision making and give transactions a better prospect of success.

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