The Investment Process of Private Equity Firms: How does the Affect Heuristic Impact Decision-making?

Abstract

Individuals utilize heuristics to simplify problems leading to potential decision-making biases. How do heuristics impact the investment process of private equity decision-makers reviewing proposals? Through an exploratory multi-case analysis, insight is provided into complex private equity decisions by studying biases in the investment process. The beginning expectation was that the affect heuristic would be dominant. Results suggest different heuristics are used through decision-making processes. Five propositions are proffered, arguing the use of different heuristics in the investment decision-making process. Decision-makers draw on learning from experience and apply deliberative heuristics to guide selection decisions regarding the opportunity. Procedural heuristics guide post transaction management decisions. Affect heuristics are utilized when reviewing business opportunities. Organizational learning is exhibited through the modification of investment structures based on previous experiences. Human capital positively impacts the investment decisions. The study indicates that experience and learning leads to the construction of different heuristics that subsequently impact investments.