Darryl Laws

 What are the factors that influence or cause irrational behavior? 

Greed. “Opportunistic behavior that is self-serving has been the central idea of agency theory in M&A transaction which states that agents (hired managers) and principal’s (owner) objectives do not match and agents make decision which are based on self-interest rather than company shareholder’s interest. This type of greedy decision is self- serving and is irrational for the firm” (Dhir, Mital, 2012). The information available to the agent / manger may be complete, but the decision is not in the interest of the firm. Greed may be for monetary or nonmonetary benefits and thus principals can both provide incentives (and incur agency cost) or apply a controlling mechanism (which incurs agency cost) to the agents / managers to do away with greedy decisions and ensure normative decision-making by its managers / agents. “Studies depict that managers / agents with high self-esteem (nonmonetary greed?) are more susceptible to self-serving bias; because they are strongly motivated to maintain their ego or self-esteem” (Dhir, Mital, 2012).

Fear. This cognitive behavior has been a personality trait of decision-makers which is relative to the risk-taking ability of the (CEO) person. Contrary to hubris bias, fear reflects the risk-averseness of the decision-maker or framing the strategy too narrowly for a mergers and acquisition transaction. This bounds the decision-maker to take a rational decision due to his own cognitive bias of not willing to make a risky decision. Risk aversion is the reluctance of a person to accept a bargain with an uncertain payoff rather than another bargain with more certainty, but possibly lower, expected payoff. Decisions are determined by gains and losses measured relative to a reference point. Loss aversion, meaning that people are more sensitive to the possibility of losses than to gains of the same magnitude, may lead executives to behave in a way that is sub-optimal from the principal’s /shareholder’s perspective. Reward systems of organization plays an important role in this trait of decision-maker, if shareholders reward risk aversion, CEOs (managers) are most likely to make conservative decisions.

Darryl Laws