Why psychology is the real key to successful acquisitions
An acquisition is one of the most consequential decisions a company or investor can make. Whether the acquirer is a corporate buyer or a private equity firm, the core question is always the same: Will this business grow? And after closing: How well will the target actually fit within the organization in terms of culture, people, and business model?
These questions are typically analyzed from financial, legal, operational, and organizational perspectives. Yet one crucial dimension is often overlooked: the psychology of decision-making.
Why even experts are biased
Research consistently shows that people, including experienced executives and investors, do not act purely rationally. Nobel laureate Daniel Kahneman demonstrated in Thinking, Fast and Slow that our minds are prone to numerous cognitive illusions that distort judgment. Even when we know these biases exist, avoiding them is difficult. In high-stakes decisions such as acquisitions, however, awareness of these psychological mechanisms is essential.
Lovallo and Sibony argue that the decision process itself is six times more important than the analysis in determining a successful outcome. Still, many organizations follow the same routine: a team presents arguments for or against a deal, and the decision maker, often the same executive, makes the final call. This structure is highly vulnerable to bias, especially when psychological pitfalls go unrecognized.
In this article, we explore the ten most common cognitive biases in M&A (mergers and acquisitions) decisions, with examples and practical ways to mitigate them. We also include insights from Prof. Stefan Zeisberger, expert in behavioral finance and faculty member of the Psychology of Risk program at the Amsterdam Institute of Finance.
Top 10 cognitive biases in M&A:
1. Narrow framing
2. Confirmation bias
3. Overconfidence
4. Anchoring
5. Groupthink
6. Illusion of control
7. Loss aversion
8. Halo effect
9. Overoptimism
10. What You See Is All There Is (WYSIATI)
1. Narrow framing: Looking at only part of the picture
People tend to jump to conclusions based on the information immediately available, while overlooking crucial context. This is known as narrow framing: you focus on only a small part of the picture.
Example
In the disastrous 2007 ABN AMRO acquisition by RBS, Fortis, and Santander, the consortium focused on short-term gains and winning the bidding war while underestimating systemic risks and the looming financial crisis. The result: a record €71.1 billion purchase for a bank that soon collapsed and required government rescue.
How to avoid it
✔ Always ask: “What is missing from this picture?”
✔ Evaluate multiple alternatives, not just “go/no-go”
✔ Involve external experts with relevant deal experience
2. Confirmation bias: Hearing only what you want to hear
People also selectively seek information that confirms their existing beliefs and discount contradictory facts. This is confirmation bias, and it is one of the most dangerous traps in M&A because it can look like rigorous analysis while actually reinforcing preconceptions.
Example
A buyer convinced of synergies reads only supportive reports and ignores warning signs.
How to avoid it
✔ Create a ‘red team’ to challenge and stress-test assumptions
✔ Ask critical questions: “What if our plan fails by 50%?”
✔ Use objective deal checklists and walk away if thresholds are not met
3. Overconfidence: Believing you are better than you are
Overconfidence bias is the tendency to overestimate your own skills, knowledge, or odds of success while underestimating risk. It is one of the most common and dangerous pitfalls in M&A, because it drives overbidding, underestimation of integration risk, and the dismissal of warning signals. Overconfidence often stems from past wins. When an executive or investor has done successful deals before, they may assume the next one will play out the same way.
Example
Studies show 80% of executives believe they perform above average, statistically impossible.
How to avoid it
✔ Benchmark against comparable deals
✔ Use independent reviewers
✔ Conduct a pre-mortem: “Imagine this deal failed in two years. Why?”
4. Anchoring: Being influenced by the starting number
The first number you see, price, valuation, or growth rate, heavily shapes judgment. Anchoring, also known as the anchoring effect, occurs because our brains tend to take shortcuts (heuristics) to simplify complex decisions. The problem is that the anchor does not need to be rational. Even if a company’s asking price is arbitrarily high, a buyer may unconsciously calibrate their offer around it. Anchoring shows up not only in price negotiations, but also in financial models (for example, when an analyst builds forecasts on historical growth without accounting for market shifts) and in cultural assessments (for example, when an early positive impression of a CEO shapes the entire due diligence process).
Example
A high asking price unconsciously drives bidding behavior even when intrinsic value is lower.
How to avoid it
✔ Perform independent valuation first
✔ Ask: “What would I bid if I never saw this price?”
✔ Use multiple valuation methods (DCF, multiples, synergies)
5. Groupthink: Consensus over critical thinking
In teams, consensus is often reached too quickly because dissenting views are suppressed. This can lead to poor decisions that no one feels comfortable challenging.
Example
In the ABN AMRO acquisition, groupthink played a role. RBS’s board had 17 members, which was too large for effective discussion. Critical voices were sidelined, and the deal was fueled by male competitive drive. Testosterone tends to rise after a win, which can increase risk-taking.
How to avoid it
✔ Limit group size (7-8 people)
✔ Assign a devil’s advocate
✔ Use anonymous voting
6. Illusion of control: Overestimating influence
The illusion of control is the tendency to overestimate your ability to influence events, especially in situations where many factors are outside your control. This bias arises because people like to feel in charge, even when reality suggests otherwise. The illusion of control is reinforced by past success stories (“We’ve completed an integration before, so this one will succeed too”) and by groupthink (“Everyone on the team agrees, so it must be the right decision”).
Example
Many buyers assume they can manage a target company better than its current owners, while in reality things often turn out differently, for example due to cultural clashes or unforeseen market changes.
How to avoid it
✔ Build a realistic integration plan with buffers for unexpected issues.
✔ Ask yourself: “What if we achieve only 50 percent of the projected synergies?”
✔ Involve the target’s current leadership team in the integration process.
7. Loss aversion: Fear of losing (even when the rational choice is clear)
Loss aversion is the tendency to weigh losses more heavily than gains, even when the potential gain is larger. Research by Daniel Kahneman and Amos Tversky shows that people experience losses about twice as strongly as gains of the same magnitude. This often leads to irrational behavior, such as holding on to a bad deal for too long because no one wants to admit the investment failed, also known as the sunk cost fallacy.
Example
A buyer who has already invested a lot of time and money into a deal keeps pushing forward, even when the warning signs are flashing red, because they don’t want to acknowledge the investment didn’t pay off.
How to avoid it
✔ Define a “kill criterion” upfront: “What signals mean we stop?”
✔ Evaluate deals based on future value, not sunk costs.
✔ Use a decision matrix to reduce emotion and force disciplined trade-offs.
8. The halo effect: One positive trait colors the whole picture
The halo effect is our tendency to form an overall positive judgment about a person or company based on one standout positive attribute. It happens because our brains like to recognize patterns and simplify complexity. If one aspect of a target is impressive (for example, a charismatic CEO, a strong brand, or an attractive market), we often project that positive impression onto the entire business, even when other factors (such as financial health, culture, or operational risks) are questionable.
Example
A charismatic founder can make buyers overlook the fact that the company has weak financial controls.
How to avoid it
✔ Use a structured due diligence checklist with weighted criteria.
✔ Separate the assessment of people from the numbers.
✔ Bring in an external party to provide an independent view.
9. Overoptimism: Overly rosy forecasts
Overoptimism, or optimism bias, is the tendency to overestimate the likelihood of positive outcomes and underestimate risks, especially in complex or uncertain efforts like M&A. This trap shows up because people want to believe in success, and the brain prefers positive narratives over negative ones. In M&A, it often leads to overly aggressive growth projections, underestimating integration time and costs, or ignoring external risks (market shifts, regulation, competitors).
Example
Acquisitions are often pursued to increase revenue or reduce costs. But research suggests that, on average, only a small share of revenue synergy forecasts are realized, while cost synergy targets are achieved far more often.
How to avoid it
✔ Use historical data from comparable deals.
✔ Build in an “optimism correction” in your models, for example a 20 percent cost buffer.
✔ Assign a skeptic on the team, with permission to challenge assumptions.
10. What You See Is All There Is (WYSIATI): Assuming you know the whole story
WYSIATI, short for What You See Is All There Is, is the tendency to treat the information you have as the full picture, even when critical pieces are missing. This happens because the brain likes to fill gaps with assumptions and create a coherent story, even if it is wrong.
Example
A buyer bases the decision on two years of financials, but overlooks market risks or cultural incompatibility.
How to avoid it
✔ Ask explicitly: “What don’t we know?”
✔ Actively search for unknown unknowns, for example with scenario analysis.
✔ Run a pre-mortem to surface hidden weaknesses before you commit.
Insights from Prof. Stefan Zeisberger: The psychology of risk in M&A
Stefan Zeisberger, a professor at Radboud University and the University of Zurich, is a leading expert in behavioral finance and the psychology of risk. He teaches the Psychology of Risk program at the Amsterdam Institute of Finance (AIF), where he helps professionals understand their own thinking patterns so they can make better decisions. “In academia, behavioral economics gets a lot of attention. In practice, we see companies becoming increasingly aware that people make mistakes. But we are still far from systematically applying these insights in decision-making processes. Most professionals don’t realize how big the impact of psychology is, especially in financial decisions.”
His research focuses on how investors and executives make mistakes, and how they can avoid them. A central theme is overconfidence: “Most professionals believe they’re better than they actually are. They think they can spot the next Google or Amazon, even though research shows that even experts often don’t perform better than chance. This is partly due to selective memory: people remember their successes more vividly than their failures, which artificially inflates their confidence.”
AIF Program highlighted: Psychology of Risk
In his program, Prof. Zeisberger teaches participants to:
✔ Recognize cognitive traps in their own decision-making.
✔ Practice making decisions in a safe environment, followed by structured analysis.
✔ Apply behavioral insights to real business situations.
“My goal is to make participants aware of their own thinking errors, not by having them read hundreds of papers, but by letting them make decisions themselves and then analyzing those decisions afterward. That’s the best way to learn.”
>> Explore the Psychology of Risk program and view upcoming dates
Conclusion: Awareness as the key to better M&A decisions
Cognitive biases are inevitable. They’re part of how our brains work. But in high-stakes decisions like M&A, they can lead to costly or even catastrophic mistakes. The good news is that awareness is the first step toward improvement.
Successful M&A isn’t just a matter of financial analysis or legal due diligence. It is also a psychological challenge. Those who recognize cognitive traps and actively work to avoid them don’t just make better decisions, they also reduce the risk of expensive errors.
Sources & further reading
– Kahneman, D. (2011). Thinking, Fast and Slow.
– Lovallo, D. & Sibony, O. (2010). The Case for Behavioral Strategy. McKinsey Quarterly.
– Zeisberger, S. (2023). Psychology of Risk (Amsterdam Institute of Finance).
– Case study: The ABN AMRO Takeover (Harvard Business Review).
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