McKinsey & Company recently published the results of a survey indicating that large companies are overly biased against making strategic investments such as acquisitions, product development, and financing startups for new products or market expansion. It is difficult to understand why in this sluggish economy companies arent investing more, especially while withheld cash is at an all-time high, interest rates are low, and valuations are reasonable.
Executives in large firms appear to be exhibiting a high degree of loss aversion they weight potential losses significantly more than equivalent gains. According to the survey, the most common biases affecting these decisions are traced to past experiences of those who make or support proposals. Typically, decision makers are using inappropriate analogies based on experiences that arent applicable to the opportunity at hand.
The presence of behavioral bias seems to have a substantial effect on the performance of corporate investments. Unfortunately, these risk adverse executives are not calculating the potential losses of not making strategic investments. I view that the primary reason for avoiding taking a strategic investment decision is a short term, defensive mentality. There are great opportunities out there for bold companies.