Nudging Investors Into Making The Right Price Offer

Investors, this article claims, don’t make the “rational” decisions that people assume they do. They respond to events in different ways depending on market conditions or even their mood on the day.

For example, they may avoid making an investment decision because of hindsight bias – the fact if an investment doesn’t work out, their boss might later look at the investment decision with the benefit of hindsight and conclude that it was always clearly a bad investment.

But how do you use the deviation of rational decision making to your advantage when selling a business?

The author explains the “endowment effect” – where people put a higher value on things that they own, the “status quo bias” etc., and provides an example of how the nudge effect is used by the UK government. Is this something business sellers can successfully implement in convincing investors to justify a higher price?

As much as people like to assume investors are rational, the opposite is usually true…

I’ve observed investors respond to similar events very differently from one point in time to the next.

For example, on some occasions in the financial markets, the prospect of stronger economic growth has led to a belief that inflation will follow. This suggests interest rates will rise… and that company profits will suffer as the cost of debt rises. So the incentive to invest to grow businesses (and earnings) will diminish. As a result, investors sell shares.

Read the article here.